Key Issues In Negotiating Financeable Ground Leases

Ground leases are generally long-term leases of property entered into between a property owner and tenant where the tenant leases land and subsequently constructs a building or other improvements on that land. Since ground tenants do not own fee title to ground leased property, financing to acquire a ground lease or construct improvements on ground leased property is more complex that conventional mortgage financing. 

A leasehold lender’s primary collateral is the ground lease itself, as opposed to the underlying land and improvements. Like a fee mortgage, if a ground lease tenant defaults on its financing, its leasehold lender will have to foreclose. However, the interest being sold at the foreclosure sale will be a ground lease and the rights thereunder as opposed to a fee interest in the land. This makes the marketability (also referred to as “financeability”) of a ground lease critically important to tenants and leasehold lenders.