On a LIHTC deal with a ground lease, the investor and the allocating agency do not stop at your partnership. They underwrite the fee owner, because the fee owner can end the deal. Here is what they ask, why, and how we answer.
You will hear it in meetings: “the IRS needs a 30-year lease.” It does not. The 30 years is the extended-use period — a 15-year compliance period plus 15 more — and it is the statutory minimum for the restrictions, not a rule about lease length.
The real constraints on term come from three other places. State agencies set their own lease minimums, often 30 to 55 years; California requires 55. Lenders want a long tail past loan maturity; behind an unsubordinated lease and a balloon loan, the agency standard is 30 years past maturity. Tax ownership of the improvements follows benefits and burdens, which counsel tests on the whole lease. We write 99 years, which clears all three.
| They ask | Our answer | Why it matters |
|---|---|---|
| Will the fee join the LURA? | Yes. The fee joins the LURA and the bond regulatory agreement for the extended-use period. It joins those and nothing else. The fee is never pledged to the leasehold mortgage. | Lessor consent is not enough. The restrictions must be a recorded covenant running with the land that survives termination of the lease. |
| Is there a purchase option, and at what price? | Only at then-fair market value, by appraisal. No fixed price, no formula price. | A bargain option invites recharacterization of the lease as financing. A fixed price over 99 years becomes a bargain. That puts tax ownership and the bond test back in play. |
| How does the rent escalate? | A fixed numeric schedule for the full term, 2% a year. No CPI test. No fair market value reset. Ever. | Agencies want rent stated as numbers, not a formula. Agency lenders accept only sum-certain increases at stated intervals. |
| What happens to rent during construction? | Capitalized until the building is placed in service. After that, lease-up rent is an operating expense, funded from a rent reserve. | Not “until stabilization.” Placed in service is the line. Budget the reserve through lease-up. |
| Is this a Section 467 rental agreement? | A question for your tax counsel, and we will cooperate. | A 99-year lease with stepped rent is a long-term agreement. A sponsor land sale and leaseback raises it too. Counsel confirms whether the steps force leveled accrual. |
| Can the investor cure our defaults? | Yes. Independent notice and cure rights that survive loan payoff. A new-lease right: lender first, investor if the lender passes. | The investor cannot rely on the lender to protect it. The lender may be paid off long before year 15. |
| Can investor exit or GP removal default the lease? | No. LP transfers, investor exit and GP removal are never defaults or consent events. | Removing a general partner is how an investor protects the credits. The lease cannot block it. |
Outside basis. Future ground rent is not a partnership liability. So the investor’s outside basis falls by its share of the debt the land used to carry. The investor will model loss limits on that lower basis. Give them the numbers early.
Tax ownership of the improvements. Your partnership builds the building, owns it, and takes the depreciation. Counsel confirms that on benefits and burdens across the whole lease, which is one more reason the purchase option has to be at fair market value.
Lease-up. The building is placed in service before it is full. Rent is an operating expense from that day, so the investor will want a rent reserve that carries it through lease-up. Size it in the budget, not after the first draw.
Year 15. Inside the compliance period, a termination of the lease cuts off the remaining credits and triggers recapture. After year 15 recapture is gone. The LURA still binds through the extended-use period, and the restrictions survive termination of the lease.
Foreclosure. The statute has a foreclosure exception that can end the extended-use period if the leasehold mortgage is foreclosed. Agencies and investors watch for it. Your counsel will walk through how it interacts with the lease and the lender’s new-lease right.
No surprise defaults. Monetary defaults get notice and cure. Defaults that cannot be cured, like a bankruptcy filing, do not end the lease while rent is paid. That is what the leasehold lender requires, and it protects the investor the same way.
A growing number of allocating agencies publish rules for third-party ground lessors. Common ones: land price capped at the last arm’s-length cost, rent stated numerically for the full term, a minimum lease term, and the lessor’s joinder in the regulatory agreement. They differ state to state and change year to year. Read your agency’s current guidance first.
Also check the property tax. Welfare exemptions, abatements and PILOT structures often turn on who holds fee title. Confirm the exemption survives a for-profit fee owner before anyone sizes NOI.
Unsubordinated means the fee is never pledged to your loan. Any mortgage on our fee sits behind the lease, the subleases and the lender’s new-lease right. The lessor is unaffiliated with the borrower. The checklist is on what leasehold lenders require. How this fits the rest of the stack is on our LIHTC ground lease page, and the gap math is on closing a 4% financing gap.
This page is a map of the questions, not tax or legal advice. Every answer above gets confirmed by your tax counsel, bond counsel and the agency before anything is signed.
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. The 30 years is the extended-use period, the statutory minimum for the restrictions. Lease minimums come from state agencies, often 30 to 55 years, and lenders want a long tail past maturity. We write 99 years.
Yes, in substance. The restrictions must be a recorded covenant running with the land that survives lease termination, so the fee joins the LURA and the bond regulatory agreement. It joins those and nothing else, never the leasehold mortgage.
Only at fair market value at the time of exercise, set by appraisal. A fixed or formula price can become a bargain option and invite recharacterization of the lease as financing.
We do not do it on affordable deals. The rent is a fixed numeric schedule, 2 percent a year, for the full term. No CPI test and no fair market value reset.
Until the building is placed in service. After that, lease-up rent is an operating expense, usually funded from a rent reserve. Confirm the treatment, and any Section 467 question, with tax counsel.
If your investor or agency has a ground lease questionnaire, send it with the deal. We answer it in writing before term sheet, so nothing surprises anyone at closing.