Ground lease capital now quotes tax credit deals for more than the land itself: the land price plus an allowance toward the building, all repaid through a single rent that rises every year. It can close a gap on the day you close. It can also move the problem to year 15. These five questions tell you which one you are holding.
Ground rent is an operating expense, so your permanent lender sizes the loan on what is left after it. Every dollar of rent removes loan. The lease adds to your sources only by the difference between what it brings in and the loan it displaces, less the rent you pay during construction.
Ask for one thing before anything else: sources and uses with the lease and without it, on the same income, with the loan re-sized each way. The headline proceeds are not the answer. The difference between those two budgets is. The mechanics are in closing a 4% gap with a ground lease.
The deferred fee is repaid from cash left after the rent and the loan payment. A lease that takes a larger share of income leaves less of it, and the rent grows every year while your forecast income grows more slowly. Your investor and tax counsel will want the forecast to show the fee repaid inside the period they expect.
Run the fee balance year by year with the lease in place. Then look at who is paid ahead of the fee in your cash flow waterfall, because that order is negotiable in more places than most budgets assume.
Three things meet at about the same date: your first loan matures, your investor exits, and some of your soft loans come due. The new lender will size against income after ground rent, at a value for the leasehold, not the fee.
Model that date with the rent schedule in the term sheet, including any inflation adjustment that lands before it. Then list which loans the refinance has to repay and which can stay. If the answer depends on rents growing faster than your agency lets you forecast, write that down, because your lender will.
Allocating agencies do not treat ground leases alike. Some have written guidance for exactly this structure. Others have rules on leased land that were written for a different purpose and cut against it. Changing from a land purchase to a land lease after an award is usually a change the agency reviews.
Soft lenders have a say too. A city or state lender can decline to sit behind a private ground lease. Read your allocation plan’s section on leased land and ask each soft lender in writing before you spend money on documents.
Read the lease for four things. When the rent and its increases start: at closing, or when the building opens. When the first inflation adjustment can land. What the landowner can do if rent is missed during the compliance period. And what your investor is allowed to do if the land is sold. The answers vary from one provider to the next, and some of them are negotiable.
Your investor’s own list is in what your syndicator will ask the land owner.
We rebuild your model with the lease in it, run these five tests on your numbers, and tell you where it passes, where it fails and what to ask for. If the lease does not work on your deal, we say so. If a smaller or differently shaped lease does, we show you that instead. How we work on someone else’s term sheet is on ground lease advisory.
When we are the land buyer ourselves, on affordable deals we size to the land, on a fixed schedule: how a ground lease works on a tax credit deal.
This page is general information, not tax, legal or investment advice. Tax credit rules, agency rules and lender requirements differ by state and by deal. Confirm each point with your counsel, your investor and your allocating agency.
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.
The land investor pays more than the land price: the land plus an allowance toward construction. The developer repays both through a single ground rent over 99 years. It is offered on tax credit deals as gap financing.
Partly. Ground rent is an operating expense, so the permanent loan is re-sized smaller. The gap closes only by the difference between the lease proceeds and the loan they displace, less the rent paid during construction. Compare sources and uses with and without the lease.
The deferred fee is repaid from cash flow after rent and debt service. A larger rent leaves less cash, and the rent grows every year. Run the fee balance year by year with the lease in place before you commit.
No. Some allocating agencies have written guidance for it. Others have rules on leased land that limit it, and a change from a land purchase to a land lease after an award is usually reviewed. Soft lenders can also decline to sit behind a private ground lease.
When rent and its increases start, when the first inflation adjustment can land, what the landowner can do if rent is missed during the compliance period, and what rights the tax credit investor has if the land is sold.
We will run the five tests on your numbers and tell you what we see. No client names needed to start.