Sponsors are told ground leases are hard to finance. They are not, when written correctly. The requirements are in the agency guides, they are specific, and a lease drafted to them is ordinary to underwrite.
Term. The remaining lease term must run materially beyond loan maturity, and the margin demanded on an unsubordinated lease is longer than on a subordinated one. A 99-year lease clears this with decades to spare and the question never arises again.
Rent. It must be a fixed, ascertainable sum. Fixed escalations are fine. Indexed adjustments with a hard cap are generally fine. A reset to fair market value determined by future appraisal is not, because it makes the tenant's largest fixed obligation unknowable at underwriting.
Mortgagee protections. Notice of tenant default must run to the lender, with cure time beyond the tenant's own period. The lender must have the right to a new lease on rejection or termination — and without conditions attached to it. The lease must not be amendable or terminable by agreement without lender consent. And a qualification test the lender has to satisfy to get those protections is itself a problem.
A leasehold lender is lending against a leasehold. If the landlord can encumber the fee with debt that sits in front of the lease, a foreclosure on the fee can extinguish the lease and with it the collateral.
The agency guidance addresses this directly: the landlord's own fee mortgage must be subordinate to the ground lease. Ask the question early. A ground lease provider that will not agree to it is offering something materially different from what the lender thinks it is buying.
Ours is unsubordinated and our fee is never mortgaged ahead of the lease. That is not a concession, it is the point.
The expensive version of this is discovering a reset clause in diligence, four months in, after the sponsor has signed and spent. The cheap version is sending the draft lease to the leasehold lender's counsel before execution and asking one question: does this meet your leasehold criteria?
A lender who has read the lease before sizing the loan gives a better number than one who finds it later.
A rent reset tied to future appraisal. It makes the largest fixed obligation unknowable, and the agency guidance treats it as unacceptable on an unsubordinated lease.
More than you think, and more on an unsubordinated lease than a subordinated one. A 99-year term removes the question entirely.
If the ground lease is terminated or rejected in a tenant bankruptcy, the leasehold lender can demand a direct new lease on the same terms. If it carries conditions the lender must satisfy, it is worth less than it appears.
Short term yes, because the lender's mortgage sits ahead of the lease. But it changes what the landlord owns and most institutional land capital will not do it. We never subordinate.
On countersign of a letter of intent, with confidentiality in place, the full form goes to their counsel. Before that we will walk any lender through the provisions in detail.
We will read it against the published leasehold criteria and tell you what a lender will object to, whether or not we are the counterparty.
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