Owners who sell their land and lease it back ask a fair question: what if the new landowner borrows against the land and then defaults? The answer is that on an unsubordinated lease, the landowner’s lender takes the land subject to your lease. That is not a courtesy. Your own lender will require it.
Your building is financed by a leasehold lender. Its collateral is your lease. If a mortgage on the land were senior to the lease, a foreclosure on the land could terminate the lease, and the leasehold loan would be secured by nothing. No leasehold lender takes that risk.
The public agency standard says so directly. Freddie Mac’s Multifamily Guide, Chapter 30, has a section written for unsubordinated ground leases. It requires that any existing mortgage on the fee be subordinate to the ground lease, to the subleases, and to any new lease given to the leasehold mortgagee. It also expects the lease to bar the landowner from mortgaging the fee unless that mortgage is expressly subordinate. Private leasehold lenders follow the same logic.
The same standard runs the other way too. The tenant may not subordinate the lease to a fee mortgage. Nobody gets to quietly move the land loan ahead of the lease later.
Subordination. The fee mortgage is recorded as junior to the ground lease. The lease is first in time and first in right.
Non-disturbance. The fee lender agrees that so long as the lease is in effect, a foreclosure will not disturb the tenant’s possession or terminate the lease.
Recognition. The fee lender, or whoever buys the land at foreclosure, recognizes the lease and the leasehold lender’s rights: notice of defaults, cure periods, and the right to a new lease if the old one is ever rejected or terminated.
These are usually signed as one agreement between the fee lender, the landowner and the tenant, and recorded. Without it, the subordination language in the lease is a promise by the landowner. With it, it is a promise by the lender who would actually foreclose.
| Document | What it should say |
|---|---|
| Ground lease | Any fee mortgage must be subordinate to the lease, the subleases and any new lease to the leasehold mortgagee. No fee mortgage unless the lender signs a recognition agreement. No merger of fee and leasehold. The tenant may not subordinate the lease to a fee mortgage |
| Fee lender agreement | Subordination, non-disturbance and recognition of the tenant and the leasehold lender, binding on any foreclosure buyer, recorded |
| Estoppel | Whether any fee mortgage exists, who holds it, and that it is subordinate. Signed by the landowner and dated close to the leasehold loan closing |
| Leasehold lender rights | Notice to the leasehold lender of every default, cure rights beyond the tenant’s, and a new-lease right on termination |
Ask for the estoppel every time the building is refinanced or sold, not just once. A landowner can place a fee mortgage years after the lease is signed. The estoppel is how your next lender confirms it is subordinate. We cover estoppels in detail in estoppels, SNDAs and lender consent, and the full agency list in what leasehold lenders require.
A mortgage that predates the lease. If the land already carries a mortgage when the ground lease is signed, recording order puts that mortgage ahead of the lease. It has to be paid off at closing or the lender has to sign a subordination, non-disturbance and recognition agreement before the lease is recorded. Your title policy on the leasehold should show it either released or subordinated. If it shows neither, your leasehold lender will not close.
A sale of the land. The landowner can usually sell the land. The buyer takes it subject to the lease, the same way a foreclosure buyer would. Nothing about your rent, your term or your lender’s rights changes. A good lease also says the new owner is bound by every estoppel the old owner signed, and that the tenant gets notice of the transfer so rent goes to the right place.
In both cases the test is the same. Pull title, read the recorded documents, and confirm the lease sits first.
A subordinate fee mortgage is harder to place. Fewer lenders will take it, and they lend less against it, because their collateral is land encumbered by a long lease they cannot disturb. That constrains how much the landowner can borrow against its own land.
We accept that. We buy land on unsubordinated leases, and any financing we ever place on our own land positions is subordinate to the lease it sits under. A lease that cannot be financed above is not worth owning below. Protecting your leasehold lender is how we protect our rent.
If you are considering a land sale and leaseback, ask the buyer at the term-sheet stage how it finances its land and whether it will sign a subordination, non-disturbance and recognition agreement with any fee lender, on a form your leasehold lender approves. A buyer that hesitates has told you something about how it plans to hold the land.
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.
Yes, but on an unsubordinated ground lease the fee mortgage must be subordinate to your lease, your subleases and any new lease to your leasehold lender. A foreclosure on the land must not terminate your lease.
If the documents are right, nothing. The foreclosure buyer takes the land subject to the lease, recognizes your leasehold lender's rights, and collects the same rent on the same schedule.
Yes. Its collateral is your lease. Leasehold lenders and the public agency standard require that any fee mortgage be subordinate to the ground lease, and they will check the estoppel.
Whether one exists, who holds it, and that it is subordinate to the lease. Ask for a fresh estoppel at every refinance or sale, because a fee mortgage can be placed years after the lease is signed.
Any financing we place on our land is subordinate to the ground lease it sits under. It limits our own leverage, and we accept that because a financeable leasehold is what pays our rent.
Or send the one you already have. We will tell you whether the fee mortgage language would clear a leasehold lender.