Money & Finance › Commercial real estate lending › Other ways to finance a building: seller notes, leasebacks, PACE
Ground leases and leasehold financing
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
A long lease of land alone: the tenant builds or owns the building on it, and the landowner collects ground rent.
See it on the Money & Finance map →How it works
Terms are long, usually 50–99 years, with set rent bumps or periodic resets to market. The tenant's interest, the leasehold, can be mortgaged if the lease is 'financeable': a term outlasting the loan by 10–20 years or more, lender notice-and-cure rights, and a right to a new lease. In an unsubordinated ground lease the landowner's claim stays ahead of the leasehold lender. Resets can hurt: the Chrysler Building's ground rent jumped from $7.75 million to $32.5 million a year in 2018.
Why it matters
Splitting land from building can raise cheap capital, but a leasehold loses value as the term runs down or rent resets jump; the Chrysler Building sold for about $150 million in 2019.
Facts, rules and data
Recorded ground leases and memoranda, Safehold's public filings on modern ground leases, and press and court records of resets such as Cooper Union's Chrysler Building lease.
Debates and risks
Whether modern 99-year ground leases sold by firms like Safehold are cheap capital or an expensive long-term liability for building owners is debated.
Connections (2)
▸Ground leases and leasehold financing usually rank ahead of leasehold Senior debt: the first-lien mortgage, paid firstFact, law or data
The connection
In an unsubordinated ground lease the landowner's rights come first: if the tenant stops paying ground rent, the landowner can end the lease and wipe out the leasehold mortgage. So the leasehold lender demands notice of defaults, cure rights and a new lease if the old one ends. In a rarer subordinated lease, the landowner pledges the land too.
When and why
In ground-leased buildings across the US, including much of Manhattan and Hawaii; Safehold has marketed modern unsubordinated ground leases since 2017.
How we know
Ground lease and leasehold mortgage documents, title insurance policies, and lender requirements published by the agencies and rating firms.
Debates and risks
How lender protections hold up when a ground tenant files bankruptcy and rejects or keeps the lease still produces court disputes.
▸Ground leases and leasehold financing trade at low Cap rates: how real estate is pricedMainstream view
The connection
Ground rent is very safe: it is paid before the building's mortgage, and if the tenant fails, the landowner gets the building. Investors therefore accept low yields, often about 3–5%, well below the cap rate on the office building above. Safe income means a low cap rate and a high price per dollar of rent.
When and why
In US markets where ground leases are common; Safehold's public filings report its ground-lease yields.
How solid is the link?
Safehold filings, appraisal practice and market surveys of ground-lease pricing; the logic is standard cap-rate math.
Debates and risks
Critics say cheap ground leases shift value from building owners to landowners over time; supporters say they lower total capital cost.