Commercial Loans and Fun Blog

Financing of Land Leases

Posted by George Blackburne on Tue, Apr 18, 2017

Land Lease.jpgWhat is a land lease?  A land lease happens when a land owner refuses to part with title to a piece of ground, but he is willing to lease out the use of the land for a very long period of time. Typically the land is unimproved, and the land lessee - the guy leasing the property - proceeds to construct a new building on the property.

Land leases can have any term, but two common lease terms are 49 years and 99 years.  Land leases are also called ground leases.

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Example:  Once upon a time, 60-year-old Tom Grumpy owned a wonderul, three-acre parcel located on the corner of Premier Boulevard and Affluent Way.  Every day 5,000 luxury sedans and SUV's drove by this corner.  Every developer in town wanted to buy this land and develop a high-end strip center, with shops like Gucci and Prada.  Old man Grumpy rejected every offer.  "The property is not for sale.  I am saving it for my grandchildren."

Enter Susie Raptor, a clever girl.  She approaches Tom Grumpy and proposes the following:  "Tom, I agree with you.  You should not sell this incredible piece of land.  It is only going to increase in value over time.  Instead, you should lease it to me for 99 years at $10,000 per month.  You can use the cash flow to supplement your retirement income, help out your kids, and to pay for college for your grandkids."  Tom agrees.  Once Happy Tom signs the lease, Susie brings in her architect and her engineer to draw up plans.  Eventually Miss Raptor (she drives a lizard-green convertible) brings the project to a local bank, who finances the construction of a gorgeous retail center.


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When the construction loan matures, Susie obtains a $12 million takeout loan from a conduit.  You will recall that a takeout loan is just a garden-variety permanent loan that pays off a construction loan.  When the conduit underwrites the takeout loan, it treats the land lease payment as just one more required operating expense.

When a commercial lender underwrites a commercial loan against the land lessee's interest in a commercial property sitting on leased ground, the lender will insist on an amortization schedule that full-amortizes the loan over a term 10 years shorter than the remaining term of the ground lease.  Huh?

Example:  Let's suppose that a convenience store sits on leased ground, and the land lease expires in 32 years.  Now ordinarily a bank will amortize its loan over 25 years.  However, ten years earlier than the 32 years remaining on the land lease is just 22 years.  Therefore the bank will amortize its loan over just 22 years.

Example:  Let's suppose that a 99-year land lease was written 45 years ago.  There is now 54 years remaining on the land lease.  Fifty-four years less ten years equals 44 years.  Does this mean that some bank will amortize its permanent loan over a whopping 44 years?  Yes?  Yes?  Nice try.  Ha-ha!  The longest amortization schedule that most banks will ever use is 25 years for a commercial building.  Unfortunately this building was constructed 54 years ago.  This is an old-old building.  Because of the age of the building (its wearing out), the bank will probably insist on an amortization schedule of just 20 years.




"Hey, George, what happens to the $7 million building on the land when the ground lease expires?" Answer:  It reverts back to the land lessor.  The land lessor is the guy who owns the land now and whose father or grandfather (usually) originally leased out the land.

"But George, what if the apartment building adjoins Central Park in New York City?  What if the building is worth $100 million.  At the expiration of the ground lease, both the land and the building still reverts back to the land lessor.

Can the land owner get a loan against his leased fee interest?  A leased fee interest is ownership of land (and building) that is leased out to someone else.  To answer the question about whether the land lessor can get a commercial loan, the answer is yes, in about a nanosecond.  In real life we don't see many of these commercial loan requests.  The families that own the land underneath huge commercial buildings are typically richer than Crassus (often because their grandfather refused to sell the land).




Is it possible to get a land lease longer than 99 years.  The answer is no.  If a party leases land for longer than 99 years; say, 110 years; the land lessor is deemed to have sold the property to the land lessee.  It is against public policy to have real estate tied up for too many generations.

Obviously a perfect ground-lease deal is one with a very long remaining term and with a very small land lease payment.

Do you need a commercial loan against a property sitting on leased land?  This is an ideal time to use  Enter your commercial loan as if it was a garden variety first mortgage request; however, in the Special Issues section, be sure to write, "The subject property sits on leased ground.  The remaining term of the land lease is 48 years, and the monthly land lease payments are $5,820 per month."


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Topics: land leases

Land Leases and Merger of Interests

Posted by George Blackburne on Fri, Jan 7, 2011

Interesting Deal Involves Merger of Land Lessor's and Land Lessee's Interests

Our hard money mortgage company, Blackburne & Sons, is competing for a very interesting loan this month. The borrower is the owner of a land lease. He leased the land to a developer for 55 years, and the developer built a large shopping center on the property.

Although the developer is still current on the underlying land lease, the shopping center has largely failed. Most of the retail spaces are vacant. The holder of the chattel mortgage on the developer's leasehold interest, a bank, started foreclosure, so the developer declared Chapter 11. The parties could not agree on a reorganization plan, so the bankruptcy court has ordered the sale of the shopping center's leasehold interest (the shopping center on leased land).

Our borrower owns the land lease. He receives a big land lease payment every month of, say, $15,000. Now he wants to buy the shopping center that sits on his land.

I was surprised to see a deal like this because normally the holder of the land lease would simply sit back and wait for the developer to default on his land lease payments. If the developer were to default, the holder of the land lease would declare him in default and "foreclose" on his land lease (more precisely terminate the developer's interest in shopping center). The holder of the land lease would then own the entire property - both the land and the shopping center that sits on the land - in fee simple (the normal way that people hold title). The land lessor's interest and the land lessee's interest would merge because they are identical parties.

In this case, however, the holder of the land lease is afraid that someone else will buy the shopping center, and he will be stuck with a "lousy" $15,000 per month income for the next 51 years. Fifteen thousand dollars per month sounds like a lot of money until you think of the hyper-inflation suffered by Zimbabwe.

Therefore our borrower is coming to us to help him purchase the land lessee's interest. Once the land lessor's interest merges with the land lessee's interest, he will be able to easily sell the combined interests for far more money than the sum of the two parts. Few investors want to buy real estate on leased land because it brings with it the obligation to make the land lease payments during a recession. In addition, real estate on leased land is sometimes difficult to finance.

Do you need a commercial mortgage loan on real estate on leased land? Simply go to and apply for a normal first mortgage. Then, in the Special Issues section, please insert the words, "The property is on leased land with 49 years remaining on the lease. The monthly land lease payments are $4,600 per month." Be sure to apply to banks. Banks are the type of commercial real estate lenders who make commercial real estate loans on leased land.

Topics: land lease financing, land leases, leased land, leasehold loans, leasehold mortgage, leasehold mortgage loans, loans on leased land