A provider offers to buy your land and make the leasehold construction loan, sometimes as one package to its investors. One party, one closing, one set of documents. It is efficient on the way in. It is the wrong structure to be in on the way out.
The offer usually comes with a good story. One party underwrites the whole project. One set of documents. No arguing between a landlord and a bank over cure periods and casualty proceeds. A faster close.
Some of that is real. But look at why the provider wants it. A land position pays a fixed rent. A construction loan pays a floating rate, origination fees and often exit fees. Putting both in one package lets a provider show its own investors a higher day-one return than the land alone would produce. The loan is doing the work the land cannot.
That is a reasonable business for the provider. It is not a reason for you to give up the separation that protects your building. Ask what the land offer looks like without the loan. If it disappears, you learned what the offer was really about.
In a normal structure, if you default on the leasehold loan, the lender forecloses on the leasehold. It sells the building, or takes it and keeps the lease in place. The ground lease survives. The landlord keeps getting rent. If the sale brings more than the debt, the surplus goes to you.
A lease termination works differently. The leasehold ends, and the building passes to the fee owner. There is no sale and no surplus. That is why leasehold lenders insist the lease cannot be terminated without notice to them, a chance to cure, and the right to a new lease. Those rules exist to make sure a loan problem never turns into a forfeiture of the building.
Now put one party in both seats. A loan default triggers a lease default, often by an express cross-default. The party in both seats now has two paths: foreclose the loan and sell, or terminate the lease and keep the building. The second path can be worth more to it. Nothing independent stands in the way.
| At a loan default | Lessor is also the lender | Independent leasehold lender |
|---|---|---|
| Notice and cure rights | Owed to itself | Owed to a separate party with its own money at risk |
| New lease after termination | Owed to itself | Enforceable by the lender against the landlord |
| How it ends | The same party picks foreclosure or termination | Foreclosure or workout; the lease stays in place |
| Surplus value | Can be forfeited if the lease is terminated | Goes to the borrower after a sale |
| Refinancing later | Often needs the same party’s consent or carries its exit fees | Any lender the lease allows, on objective criteria |
Loan sizing. A provider that earns on both pieces can stretch the loan to make the package work. Look at the leasehold coverage at the rate floor, not at the projected rate. If the building barely covers the loan after ground rent, the package was built for the provider’s raise, not for your project.
Refinancing. Construction loans are meant to be refinanced. A bundled loan can carry exit fees, minimum interest, or consent rights that make a third-party refinance slow or expensive, sometimes waived only if the provider’s own affiliate does the refinance.
Agency take-out. Agency and many private leasehold lenders look for a ground lessor that is independent of the borrower and a lease with full mortgagee protections. A package designed around one party can need rework before a permanent lender will lend behind it. See what leasehold lenders require.
We buy the land and hold it. We do not make leasehold loans, construction or permanent, short or long, with or without guaranties. That is not a pricing choice. It is the whole point of the structure: our lease is drafted so an independent leasehold lender can lend behind it with notice, cure, new-lease rights and no termination for incurable defaults.
We arrange the leasehold loan with an independent lender. Our fee for that is 1% of the loan, earned only at the closing of that financing. If the loan does not close, it is not earned. More on the lender side in leasehold mortgage financing.
1. Does any default under the loan let you terminate the ground lease? Show me the cross-default language.
2. Will the lease carry full leasehold mortgagee protections that run to any future lender, including a refinance lender, and to anyone you sell the loan to?
3. On a default, do you commit to foreclose rather than terminate, and does any surplus come to me?
4. Can I refinance the loan with an unrelated lender without your consent, exit fee or minimum interest?
5. Is the loan sized independently, and what is the leasehold coverage at the rate floor after ground rent?
6. Are the fee and the loan held by different entities with different investors, and who decides at a default?
Clear, written answers to all six make the package safer. Vague answers tell you what you need to know.
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.
It can be survivable if the lease carries full leasehold mortgagee protections for any future lender, there is no cross-default that lets a loan default terminate the lease, and you can refinance away freely. Most bundled offers do not give all three. Separation is cleaner.
Foreclosure sells the leasehold and keeps the lease alive, and any surplus over the debt goes to the borrower. Termination ends the leasehold and the building passes to the fee owner, with no sale and no surplus.
No. We never lend on the leasehold. We buy the land and arrange the leasehold loan with an independent lender, for a 1 percent fee earned only at the closing of that loan.
It is one more source of fees and yield, and a combined package can be easier to sell to its own investors. That is the provider's reason, not yours. Ask the six questions on this page.
Yes. Agency and many private leasehold lenders look for a ground lessor that is not a borrower affiliate and a lease with full mortgagee protections. A lease designed around one party in both seats can need rework before a permanent lender will lend.
The term sheet for the land and the term sheet for the loan. We will show you where the default path runs and what an independent leasehold lender would need.