A long lease of land on which the tenant owns or builds the improvements. A lender to the tenant takes a lien on the leasehold, not on the land.
In a ground lease the landowner keeps the land (the leased fee) and the tenant holds the right to use it (the leasehold), usually with buildings the tenant paid for. When the lease ends, the improvements normally revert to the landowner. A loan to the tenant is therefore secured by an asset that shrinks toward zero as the lease runs down.
Lenders respond with term rules. The OCC handbook says that when a loan does not fully amortize, the ground lease should extend beyond the amortization period, customarily by 20 years. When the loan fully amortizes, a lease running 10 years past maturity is usually sufficient. Ground rent is deducted as an expense when the lender calculates debt service coverage.
The lender will also want to be notified if the tenant defaults under the lease, with the right, but not the duty, to cure. The handbook notes the lender is most secure when the landowner subordinates the fee to the mortgage. Fannie Mae’s guide requires a lien on the leasehold estate and a signed estoppel certificate from the ground lessor. Bring the full ground lease and every amendment to the first meeting.
How it shows up in the data here
Not in the data. No bank call report, credit union report or HMDA record here says whether a loan is secured by a leasehold or by fee title, and no lease terms are in any public filing on this site. Use the lender lists by property type, such as investor CRE lenders, and ask each lender whether it lends on leaseholds.
Go further
- Investor CRE lenders: Lenders that hold loans on income-producing commercial property.
- DSCR calculator: Enter ground rent as an expense to see coverage.
- DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
- Maximum loan calculator: The loan each test allows: DSCR, LTV and debt yield side by side, and which one binds.
- Investor commercial real estate loan checklist: On an investor property the rent pays the loan. The package is the evidence for the rent: who pays it, for how long, what it costs to collect, and who stands behind the borrower if it stops.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- NNN lease (triple net): A lease where the tenant pays rent plus the property's operating costs, typically taxes, insurance and maintenance. The exact split is whatever the lease says.
- Subordination, non-disturbance and attornment (SNDA): An agreement in which a tenant puts its lease behind the lender's mortgage, the lender agrees to honor the lease after a foreclosure, and the tenant agrees to treat the new owner as landlord.
- Tenant estoppel certificate: A signed statement from a tenant confirming the terms of its lease and that the lease is in effect, which a lender or buyer can then rely on.
- Debt service coverage ratio (DSCR): Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
- Title insurance (lender's policy): A policy that protects a lender against loss if its mortgage turns out not to have the lien priority it expected, or if title to the property is defective.
- Amortization: The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.