A sponsor offers a single investment: you own the land under a new project, and the same vehicle makes the construction loan on the building. The pitch is a higher day-one coupon than land alone. Before you buy it, separate the two pieces and underwrite each one as if it were sold on its own.
| The land | The construction loan | |
|---|---|---|
| Collateral | Dirt, plus the building at default or expiry | A leasehold interest in a building under construction |
| Paid from | Ground rent, off the top of NOI | Interest, then a refinance or sale to repay principal |
| Main risk | Term, escalators, coverage | Completion, cost overrun, lease-up, refinance market |
| Horizon | Decades | A few years |
| Who else is behind you | The loan and the sponsor’s equity | Only the sponsor’s equity |
If the documents do not let you see each column on its own, ask for it. If the sponsor will not split it, that is the answer.
Floating-rate construction loans usually carry a floor. Test coverage at the floor, not at a forward curve. Ground rent comes off the top of NOI before debt service, so subtract it first.
Illustrative only. A project projects $4.0 million of stabilized NOI. Ground rent is $1.2 million. That leaves $2.8 million for the leasehold loan. If interest on the loan at its floor rate is $3.1 million a year, coverage is about 0.9 times. The building does not pay its own loan at stabilization. The plan depends on rates falling or on a refinance sized at the edge.
When that loan defaults, the investors who own it are the same investors who own the land. The land’s seniority does not help them on the loan side.
Read the offering for every fee, then read the operating agreement for the ones the offering does not call fees. The usual layers:
An upfront load on capital deployed, sometimes shared with a placement agent. An annual servicing fee on the loan, taken out of interest before investors see it. A promote inside the land vehicle, sometimes labeled “subordinate equity” or a sponsor class, in a document that elsewhere says there are no performance fees. And exit fees or minimum interest on the loan that can be waived if the refinance comes from an affiliate.
Add them up per dollar invested, then compare the net to what the land alone would pay you. The bundle’s higher coupon is often smaller than it looks after the layers come out.
Inventory what is missing from the data room before what is present. The document with the waterfall is the one that matters most and the one most often absent.
When the lender is a sponsor affiliate, the sponsor sits on both sides of every hard decision. Extend the loan or call it. Waive a covenant or enforce it. Refinance with an affiliate and waive the exit fee, or take a third-party refinance and collect it. Each choice moves value between the sponsor and the investors.
Ask who votes on a loan default, whether investors can replace the servicer, and whether an affiliated refinance needs investor consent. If the answers are the sponsor, no and no, you have bought a loan the sponsor controls.
On an unsubordinated lease, a default on the leasehold loan does not reach the land. The land stays senior. But someone still has to pay the ground rent. If the leasehold lender forecloses, it steps into the lease, and in a bundle that lender is you. You may end up funding ground rent to yourself, and the cost to finish the building, from the loan side, to protect the land side.
Also check the price paid for the land. On development deals the land is sometimes bought well above its as-is value, with the premium recovered through rent. Ask for the as-is land value, the leased-fee value and the price. Until the building exists, the collateral is worth less than the check.
1. What did the vehicle pay for the land, and what is the appraised as-is land value? 2. What is leasehold debt coverage at the loan’s rate floor, after ground rent, on the appraiser’s NOI rather than the sponsor’s? 3. Who is the lender of record, and is it an affiliate? 4. List every fee, load, servicing charge and promote, per dollar invested, including any class of equity the sponsor holds in the land vehicle. 5. Who decides on a loan default, an extension or a refinance, and can investors replace the servicer? 6. Is any exit fee or minimum interest waived on an affiliated refinance? 7. Where is the fund or partnership agreement with the waterfall, and why is it not in the data room?
A sponsor with a good deal answers all seven in writing within a week. Read the documents, not the summary. The person raising the capital is often not the person who underwrote the deal, and a verbal answer about the lender, the escalator or the size is worth what you paid for it.
Buying only the land gives you the senior seat and lets an independent leasehold lender take the construction risk and underwrite it as its own. That lender’s diligence is a second check on the project. In a bundle, the second check is missing.
This is our own rule. We buy land and hold it. We never lend on the leasehold. We arrange that debt from third-party lenders and do not hold the paper. More on how the two sides fit together in ground lease construction financing and, for land buyers, how family offices buy ground leases.
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.
Not necessarily. It is two investments sold as one. The land can be sound while the loan is not. Underwrite each piece separately and compare the net to what the land alone would pay.
Subtract ground rent from stabilized NOI, then divide by annual interest at the loan's rate floor. If the result is below one, the building does not cover its own loan at stabilization.
Upfront deployment loads, an annual loan servicing fee, a promote inside the land vehicle sometimes labeled subordinate equity, and loan exit fees that can be waived on an affiliated refinance. Read the operating agreement, not just the offering summary.
On an unsubordinated lease the land is not pledged to the loan. But in a bundle the same investors own the loan, so protecting the land can mean funding rent and completion costs from the loan side.
No. We buy land and hold it, and we never lend on the leasehold. We arrange leasehold debt from third-party lenders.
We will separate the land from the loan and tell you what each piece looks like on its own. No pitch attached.