Buying an Apartment Building on a Ground Lease: Financing, Value and Exit Risks
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When a syndication buys an apartment building on a ground lease, the deal company owns the building and the leasehold, but someone else owns the land and the deal pays them rent for it, often for a term of 50 to 99 years. That changes the deal in three ways. Ground rent is an extra operating cost, and scheduled rent resets can raise it sharply. Lenders will only lend if enough of the lease term remains after the loan matures: Freddie Mac's Multifamily Seller/Servicer Guide, Chapter 30, for example, requires the remaining ground lease term to extend at least 10 years beyond maturity for a fully amortizing loan, and, for a loan with partial or no amortization on an unsubordinated ground lease, at least 30 years beyond maturity. And because buyers and their lenders face the same rules, the building's value and your exit options fall as the remaining term gets shorter. Read the ground lease before you underwrite.
This guide covers what to check in the ground lease, how lenders treat it, and how to model it. For the purchase process generally, see apartment purchase contract contingencies.
What to read in the ground lease
| Term | Why it matters |
|---|---|
| Remaining term and extension options | Sets financing and value; extensions are only as good as their conditions |
| Ground rent schedule | Fixed bumps, inflation adjustments or resets to land value |
| Reset method | Appraisal of land value, market rent, or a formula; who picks the appraiser |
| Subordination | Whether the land owner's interest stands behind the leasehold loan (rare) |
| Lender protections | Notice and cure rights for the lender, a new lease if the old one ends, no amendments without lender consent |
| Use restrictions | Limits on use, alterations or redevelopment |
| Assignment | Whether you can sell or transfer the leasehold, and the lessor's consent |
| End of term | Who owns the building when the lease ends (usually the land owner) |
| Purchase option or right of first refusal | Whether the deal can buy the land |
How do lenders treat a ground lease?
Lenders lend on the leasehold only if the ground lease protects them. Typical requirements include enough remaining term, the right to notice of a default and time to cure it, a new lease on the same terms if the lease is terminated, and no changes without the lender's consent. Freddie Mac's Chapter 30 sets the remaining-term tests above; Fannie Mae and other lenders have their own. Ask the lender to review the ground lease early, because fixing it requires the land owner's agreement and can take weeks.
A worked example (made up)
The numbers below are invented to show the exit problem.
- A building sits on an unsubordinated ground lease with 45 years left. The deal uses a 10-year loan with interest-only payments. Under a 30-years-past-maturity test, the loan needs at least 40 years remaining: 45 works.
- The business plan sells in year 7, when 38 years remain. A buyer seeking the same kind of 10-year loan would need 40 years left at closing, so that loan is not available. The buyer may need a shorter loan, a fully amortizing loan, a different lender or an extension of the ground lease, and will pay less for the building.
A ground lease extension negotiated before you sell can be worth more than any renovation.
How to model a ground lease
- Add ground rent as an expense line, with each scheduled increase and a conservative estimate of any reset.
- Use a leasehold cap rate. Leasehold interests usually trade at higher cap rates (lower values) than fee simple, and the gap widens as the term shortens.
- Stress the exit. Model the remaining term at sale and the financing a buyer could get.
- Price the land option. If you can buy the land, model the deal with and without it.
- Disclose it. Describe the ground lease, rent schedule, resets and remaining term in the offering documents and risk factors.
How DoorRaise fits in
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FAQ
Is a ground lease deal always worse than owning the land?
Not always. A lower purchase price can offset ground rent, and some ground leases are long and stable. The risk is in rent resets and a shrinking term.
Can the deal depreciate the building on a ground lease?
The deal can generally depreciate improvements it owns. Ground rent is generally deductible as rent. Ask your CPA about the specifics, including any prepaid rent or lease acquisition costs.
What happens at the end of the ground lease?
Usually the land owner takes the building with no payment, unless the lease says otherwise. Value approaches zero as the end nears, which is why remaining term matters so much.
Do I need a ground lessor estoppel?
Yes. Lenders and buyers ask the land owner to confirm the lease is in effect, the rent is paid and there are no defaults. See estoppel certificates.
Next step: see how loan terms flow into investor returns in syndication loan terms investors should check.
Sources
- Freddie Mac Multifamily Seller/Servicer Guide, Chapter 30 (ground lease mortgages)
- Fannie Mae Multifamily Guide
This article is general information, not legal, lending or investment advice. Ground leases vary widely. Talk to a real estate attorney and your lender before you buy a leasehold. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.