How leasehold loans differ from fee loans
A leasehold lender takes a mortgage on the tenant's interest in the ground lease and the improvements, and in most cases cannot foreclose on the land. If the ground lease terminates, the collateral disappears. That makes the ground lease the core of the credit, and lenders send it to counsel early. Capital Partners has arranged this type of financing, including a 10-year fixed-term loan on a single-tenant retail ground lease in Los Angeles.
Ground rent is paid before debt service, so it reduces the income available to the loan. Resets tied to appraised land value or inflation can raise it sharply, and lenders underwrite the rent schedule across the full loan term. Run net income after ground rent through the DSCR calculator and the debt yield calculator.
Subordinated and unsubordinated ground leases
In an unsubordinated ground lease, the landowner's fee interest stays senior to the leasehold mortgage. The lender's collateral is the leasehold only, and if ground rent goes unpaid the landowner can move to terminate. Most institutional ground leases are unsubordinated.
In a subordinated ground lease, the landowner places its fee interest behind the leasehold mortgage, so the lender can foreclose on the land as well. Proceeds and lender interest improve considerably, and landowners charge for that risk through higher rent or other concessions. Subordinated structures appear most often in development deals where the landowner is effectively a partner in the project.
Remaining lease term against loan term
Lenders need the ground lease to run well past loan maturity, so that a buyer or the lender itself could refinance or sell the leasehold at the end of the loan. Amortization generally has to finish comfortably before the ground lease expires. As remaining term shortens, value and financeability fall quickly, and owners with older ground leases often negotiate an extension with the landowner before seeking new debt.
Purchase options and rights of first refusal also affect the credit. A tenant option to buy the fee can let the leasehold owner combine the positions later, while a landowner right to approve transfers can limit who could buy the leasehold after a foreclosure. Lenders read those clauses alongside the term and rent schedule, together with any use restrictions that would limit re-leasing the building to a different tenant.
Lender protections the ground lease needs
Older ground leases often lack some of these provisions. A lease amendment or a recognition agreement signed by the landowner can usually add them, so identify the gaps before going to lenders.
- Notice and cure: the landowner sends default notices to the leasehold lender and gives it time to cure before terminating
- New lease rights: if the ground lease terminates, for example after a tenant bankruptcy, the lender can require a new lease on the same terms
- Estoppel certificates: the landowner confirms the lease is in effect, rent is current, no defaults exist, and no amendments are missing from the lender's copy
- Assignment rights: the leasehold can pass to the lender at foreclosure and to a later buyer without landowner consent
- Casualty and condemnation: proceeds are applied under terms the lender controls, with no merger of fee and leasehold without lender consent
Financing the leased fee position
The landowner's side is a different credit. A leased fee loan is secured by the land and the ground rent, which is senior to everything the tenant owns. Lenders underwrite the tenant's credit, rent escalations, remaining term, and the value of improvements that revert to the landowner at lease end. Ground leases to national retailers and restaurant operators finance much like single-tenant net lease assets. Because the ground rent sits ahead of the tenant's own debt, a well-structured leased fee loan often draws conservative, long-term capital.
More on tenant-driven underwriting is on the NNN single-tenant page. For a leasehold or leased fee request, submit the deal with the full ground lease and all amendments.
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Common questions
Can you get a loan on a building on leased land?
Yes. A leasehold mortgage finances the tenant's interest in the ground lease and the improvements. Lenders need enough remaining ground lease term, leasehold mortgagee protections in the lease, and an estoppel from the landowner.
What is the difference between a subordinated and unsubordinated ground lease?
In a subordinated ground lease, the landowner places the land behind the leasehold mortgage, so the lender can foreclose on both. In an unsubordinated ground lease, the land stays senior and the collateral is the leasehold only. Subordinated leases usually support higher proceeds.
How much remaining ground lease term do lenders need?
Lenders want the lease to extend well beyond both the loan maturity and the amortization period, and requirements vary by lender type. Short remaining terms often call for an extension from the landowner before refinancing.
What if my ground lease lacks leasehold lender protections?
The landowner can usually add them through a lease amendment or a recognition agreement with the lender. Starting that conversation before the loan application avoids delays at closing, and landowners are often willing because a financeable leasehold supports the value of their fee position.
Can the landowner borrow against a ground lease?
Yes. A leased fee loan is secured by the land and the ground rent. It is underwritten on tenant credit, rent escalations, remaining term, and the value of the improvements that revert at lease end.
Can a broker get a loan on a restaurant built on ground-leased land?
Yes. Lenders will finance the leasehold when the ground lease runs well past the loan term and gives the lender notice and cure rights. Capital Partners reviews the ground lease before it goes to lenders, and has closed a 10 year fixed-term loan on a single-tenant retail ground lease in Los Angeles.
Who finances buying the land under a ground lease?
Leased fee buyers are financed on the ground rent, the tenant's credit, and what the land and improvements are worth when the lease ends. Banks, life companies, and private lenders all lend on leased fee positions, and Capital Partners matches the request by remaining lease term and tenant.