A sponsor gets the land for a song: a city resale, a long-held family parcel, a site bought years ago. Then the gap shows up in the building. A ground lease on land alone writes a small check. There is a way to write a bigger one without anyone pretending the land is worth more than it is.
The blunt way to get more capital from a land buyer is to have the buyer overpay for the dirt. That creates an appraisal gap the leasehold lender, the investors and the sponsor’s own partners all have to explain. It also hides what the money is for.
Splitting the price into X and Y keeps it honest. X matches the contract. Y is labeled as what it is: capital toward improvements that the landlord will own at the end of the lease and is paid for through rent in the meantime. Everyone underwriting the deal can see both numbers.
1. Your equity spends first. X funds at closing. Y funds through milestone construction draws only after sponsor equity is in. We never fund ahead of need into an unbuilt project. That protects you as much as us: the contribution goes into work that is already underway.
2. The whole price stays inside a proceeds cap. X plus Y together stay at or below 35% of appraised real-estate value at stabilization. Real estate only, not going concern. That cap is what keeps the land position from swallowing the building.
3. Rent stays sized to stabilized NOI. Ground rent stays at 20–30% of projected stabilized NOI, 20–25% for hotels, so the building covers the rent three to four times at stabilization. On thin-margin deals, coverage binds well before the proceeds cap does.
4. The leasehold lender has to accept it. Ground rent is a priority expense. The lender sizes after it. A larger rent means a smaller leasehold loan, so the lender has to see that the contribution replaces more capital than the loan it displaces, and it has to approve the draw sequence. We put the lender math in front of the lender early. See what leasehold lenders require.
Illustrative only: a $22M development on land under contract for $0.8M, appraised at $28M of real-estate value at stabilization.
| Illustrative | Land alone | X plus Y |
|---|---|---|
| X: land at contract price | $0.8M at closing | $0.8M at closing |
| Y: improvement contribution | None | $3.0M in milestone draws, after sponsor equity |
| Total price | $0.8M | $3.8M |
| Share of appraised real-estate value | 3% | 14%, inside the 35% cap |
| Ground rent | Small | Higher, sized so coverage stays 3–4× |
| Who owns the building | You | You, for the full 99 years |
The rent itself is fixed, non-amortizing and priced on the land position. We quote it on the actual property, in writing, not on a web page.
The full price is committed at closing. It is not funded in full on day one. X funds at closing, usually paying off the land contract or the seller directly. Y sits behind your equity in the draw sequence.
Once your equity is spent, Y funds against the same milestones the construction lender uses: foundation, structure, dry-in, and so on. Each draw is tied to work in place, inspected by the same consultant the lender uses, and released in the order the lender and we agree in writing before closing. Retainage and change orders follow the same rules as the construction loan.
Rent on Y is part of the fixed rent schedule set at closing. Whether it starts at closing, at each draw or at completion is a term we set on the actual deal, and it is written into the lease, not left to a side letter. There is no balance to pay off and nothing to refinance. When the building stabilizes, you refinance your leasehold loan. The ground lease stays exactly as it was.
It fits a sponsor with cheap land, a sound stabilized NOI, real equity going in first, a construction lender already at the table, and a gap after senior debt that is a modest share of cost. The contribution closes the last piece without a JV partner taking the upside. Compare it with the other ways land enters a stack in land as construction equity.
It does not fit a project with a thin yield on cost, where coverage caps the rent before Y gets large. It does not fit a gap that is a third of the budget. It does not fit a sponsor who wants Y funded before their own equity, or a lender who will not accept the draw sequence. And it is never a back door to a loan from us. We do not lend on the leasehold.
A simple test: if the project only works because Y is large, it does not work. Y should close the last slice of a stack that is already mostly built, not carry it.
How Y is treated for tax and accounting on your side is a question for your CPA. Ask early.
The land, on a 99-year lease: nothing to manage, senior to the building’s lender, low yield because the buyer is buying the right to not pay the tax. The building above it: higher yield, paid monthly, depreciable. Both are replacement property. Both close on a date we control, which is the part that matters on day 140.
1031 SolutionsWorking with an intermediary? The standby sheet for line 3 of the identification form.
No. There is no note, no interest rate, no maturity and no repayment. It is part of the price the landlord pays for the fee position, and it is recovered through a higher fixed ground rent over the lease. We never draft it as a loan.
The land portion funds at closing. The contribution funds through milestone construction draws after the sponsor's equity is spent. We never fund ahead of need into an unbuilt project.
Land plus contribution stays at or below 35 percent of appraised real-estate value at stabilization, and the rent has to leave the building covering it three to four times. On most deals coverage is the tighter limit.
Yes. Ground rent comes off the top before the lender sizes the loan, and the lender has to approve the draw sequence. We give the lender the math early so the answer comes before anyone spends money on documents.
You do, for the term of the lease. You build, operate, finance and sell the leasehold. As with any ground lease, improvements pass to the fee owner when the lease ends, which on a 99-year lease is a long way off.
Land price, total cost, stabilized NOI and the loan on the table. We will tell you whether land alone, X plus Y, or neither is the right answer.