A 4% developer wrote us in October 2026 with a familiar problem: the deal pencilled a year ago, and now there is a gap. The permanent loan is smaller and the equity check is smaller. Costs did not fall. One line in the budget is still being carried by the most expensive dollars in the stack: the land.
The loan got smaller. Your permanent lender sizes on coverage. When rates rise, the loan constant rises, and the same NOI at the same DSCR supports fewer dollars.
The equity got smaller. When investors pay less per credit dollar, the same credits raise less. Nothing about your building changed.
The cost did not move. Hard costs, soft costs and the land are what they are. The usual fixes are deferred developer fee, soft debt and local gap money. Each one is capped, slow, or both.
The land line is the one use nobody looks at. It sits inside the amortizing permanent loan, paid down at the same constant as the building. Land does not wear out. It does not need to amortize.
Eligible basis is unaffected. Land was never in it. Every credit dollar comes from the depreciable building, and the building stays with your partnership. Leasing the land costs you zero credits.
The bond test. For buildings placed in service in tax years after 2025, where bonds issued after 2025 finance at least 5% of aggregate basis, the test drops from 50% to 25% of aggregate basis. Legacy issues stay at 50%. Land is part of aggregate basis when the partnership buys it. Leased land carries no partnership basis, so it leaves the denominator. The practical effect: fewer bond dollars clear the test. That matters most where volume cap is the scarce resource. Model it with bond counsel under the threshold that applies to your issue.
A 4% bond deal is the better fit for this than a 9% deal. On a 9% deal, land acquisition is the classic cost that clears the 10% carryover test, and without a land purchase you have to clear it with other costs. Our LIHTC ground lease overview covers both.
The math is a net. You gain the land price. You lose the loan the rent would have supported. How much you lose depends on how your lender treats the rent.
Rent as an operating expense. Most lenders net ground rent above the line, like taxes. The lost loan per dollar of land is the ground-lease rate divided by DSCR times the perm constant. The lease adds proceeds only when the ground-lease rate is below DSCR times the constant.
Combined coverage. Some lenders test NOI against rent plus debt service together. The lost loan per dollar of land is then the ground-lease rate divided by the constant alone. The bar is higher and the pickup is smaller.
| Illustrative only | Conservative | Base |
|---|---|---|
| Assumptions | $1.0M stabilized NOI, 1.15x DSCR, 7.75% perm constant, $3.0M of land. Combined coverage, a small rate cushion, construction-period rent netted. | Same deal. Rent netted as an operating expense, construction-period rent netted. |
| Fee-simple perm loan | About $11.2M | About $11.2M |
| Gross pickup per $1 of land | About $0.39 | About $0.47 |
| Net added proceeds | About $0.8M | About $1.1M |
Lead with the conservative column. That is the number to put in a gap memo. A larger land share produces a bigger headline. We do not lead with it, and you should not either.
Two more honest points. Lenders size against the full rent schedule and escrow ground rent monthly, so expect them to be careful. And cash flow after fixed charges gets thinner by the rent’s share of NOI where the rent is netted as an expense. Your investor will model both.
You do not get to pick the land number. It is capped by the appraised land value, by your state agency’s land-cost rules (often the last arm’s-length cost), and by the coverage our rent needs to stay safe. On affordable deals the slice is usually in the low single-digit millions. Our total purchase is also capped at 35% of appraised stabilized fee simple value.
The rate test fails. If your perm constant is low, the bar is low. A long, low-constant execution can beat the ground lease on fee simple. Run it before you spend a dollar.
The land is small. Below roughly $1.5M of land, transaction costs eat most of the pickup.
Your tax exemption turns on fee title. Welfare exemptions, abatements and PILOT structures often depend on who owns the land. A sale can trigger reassessment. Confirm the exemption survives a for-profit fee owner before you size NOI.
Your permanent execution is HUD. We do not sign HUD’s lessor addendum. See HUD loans on a ground-leased site.
The land is already free. If a public agency or nonprofit is leasing you the site at nominal rent, the land is a subsidy already. There is nothing to monetize.
The fee joins the LURA for the extended-use period. Any purchase option is at fair market value. Rent steps are fixed. The full list, with our answers, is on what your syndicator will ask the land owner. We never lend on the leasehold. We will introduce leasehold lenders and arrange that debt if you want help.
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. Land is never in eligible basis. The depreciable building generates every credit dollar and it stays with your partnership.
Leased land carries no partnership basis, so it leaves the aggregate basis denominator and fewer bond dollars are needed to clear the test. The threshold is 25 percent where post-2025 bonds finance at least 5 percent of aggregate basis for buildings placed in service after 2025, and 50 percent otherwise. Confirm with bond counsel.
Illustratively, about 47 cents of net proceeds per dollar of land when the lender nets rent as an operating expense, and about 39 cents under combined coverage, before construction-period rent. On a $1 million NOI deal with $3 million of land, the conservative case is about $0.8 million.
When the ground-lease rate is not below your DSCR times the perm constant, when the land is small, when a property-tax exemption depends on fee title, when the permanent loan is HUD-insured, or when the land is already leased at nominal rent.
One sources and uses with the land line, stabilized NOI, your lender's DSCR and constant, the land basis and how it was acquired, and the state. We run the test both ways and send it back.
With the land line, stabilized NOI, the lender’s coverage and constant, and the state. We run the accretion test under both coverage conventions and tell you which case you are in. No call needed first.