Date: August 5, 2024Attorney: Joshua M. Gorsky

What is a ground lease?

A ground lease is a long-term agreement where a ground tenant leases land from a landowner and has the right to develop and use that land during the lease period. Typically, the ground tenant owns any improvements made to the land (such as buildings) and the improvements revert to the landowner at the end of the lease period.

What is a leasehold mortgage?

A leasehold mortgage is a loan secured by a ground tenant’s interest in a leasehold portion of the property (i.e. the right to occupy a property) rather than ownership of the property itself.

Why are leasehold mortgages considered riskier than fee mortgages?  

  • The collateral is less secure. If adequate lender protections are not included and a ground tenant defaults, the landowner can terminate the ground lease, effectively extinguishing the leasehold lender’s security.
  • The leasehold lender has no interest in the land. If leasehold lender had to foreclose on its collateral, the marketability of a leasehold interest in a property is significantly less than a fee interest. This may hurt lender’s chances of selling the collateral and recovering lender’s outstanding balance on their loan.
  • The rights of the leasehold lender are limited to those available to the ground tenant under the ground lease. Ground leases often have restrictions on operations, as well the assignability / transferability of the lease. If a leasehold lender “steps into the shoes” of a ground tenant, its ability to operate may be limited.

How can leasehold lenders mitigate some of the risks?

Review and scrutinize the existing ground lease. Many ground leases include specific sections governing future leasehold mortgages that include:

  • The right for a leasehold lender to receive notice and a right to cure any defaults under the ground lease by ground tenant.
    • Language subordinating any current or future fee mortgage to the rights of the ground tenant under the ground lease.
    • Assignability and subletting rights for ground tenant (and leasehold lender) that provide a leasehold lender the opportunity to sell or sublease the leasehold position under the ground lease after a foreclosure.

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