A long-term lease of land on which the tenant owns the improvements, creating a leasehold estate a lender can mortgage.
The longer version
A ground lease is a long-term lease of land, under which the tenant builds or owns the improvements while the landowner keeps the land. Terms commonly run for decades, and at the end of the lease the improvements typically revert to the landowner unless the lease says otherwise.
For a lender, financing a ground-leased property means lending against the tenant's leasehold interest rather than the land. The collateral is the right to occupy and operate the building for the remaining lease term, so the lease itself becomes the most important document in the file.
Lenders look for a standard set of leasehold mortgagee protections. Notice to the lender of any tenant default, and a right to cure it. A right to a new lease on the same terms if the ground lease is terminated, for example in a bankruptcy. No amendment or surrender of the lease without the lender's consent. A right to assign the leasehold on foreclosure. And a remaining term that runs comfortably beyond the loan's maturity, because the leasehold loses value as the lease shortens.
Ground rent matters to underwriting too. It is paid ahead of debt service, so escalations, reset provisions and fair market value resets are read carefully, and a ground lessor estoppel confirming the lease is in effect and not in default is a standard closing item.
Common questions
- What is a ground lease?
- A long-term lease of land under which the tenant builds or owns the improvements and the landowner keeps the land. At the end of the term the improvements usually revert to the landowner.
- Can you get a loan on a ground lease property?
- Yes, through a leasehold mortgage secured by the tenant's interest in the lease. Lenders require mortgagee protections in the ground lease, such as notice and cure rights and a right to a new lease, and a remaining term well beyond the loan's maturity.
- What is the difference between a ground lease and a regular lease?
- A regular lease rents space in a building the landlord owns. A ground lease rents only the land, and the tenant typically builds, owns and finances the improvements for the life of the lease.
- What is a ground lessor estoppel?
- A signed statement from the landowner confirming the ground lease is in effect, the rent, and that no default exists. Lenders require it at closing so the leasehold they are lending against is confirmed by the party who could terminate it.