What financing challenges do tenants face when using ground-leased land for development?

Tenants developing projects on ground-leased land often face distinct financing challenges compared to fee-simple land ownership. Since they do not own the land, lenders view their rights as limited, time-bound, and subject to conditions in the lease agreement. These challenges can affect both construction funding and long-term refinancing, making lease structure and documentation critical for securing capital.

1. Limited Collateral Value of Leasehold Interest

• Tenants cannot offer full land ownership as collateral, reducing the perceived security of the loan.
  
• Lenders typically discount the value of a leasehold interest, especially if:
  
  • The lease term is under 30 years.
    
  • The lease lacks long lock-in or renewal options.
    
• In shorter or flexible leases, collateral value may be too low to support high loan-to-cost ratios.
  

2. Lease Terms Must Support Loan Tenor

• Lenders require that the loan maturity is shorter than the remaining lease term, ideally with a buffer of 10–15 years.
  
• For long-term loans (10–15 years), leases must be:
  
  • At least 30–40 years in total duration
    
  • Fully registered and enforceable under local property laws
    
• If lease renewal terms are vague, banks may deny or limit funding.
  

3. Landlord Consent and Subordination Requirements

• Most lenders insist on:
  
  • NOC from the landowner permitting the mortgage of leasehold rights
    
  • Tripartite agreements between the tenant, the lender, and the landowner
    
  • Right to step in and cure tenant default before lease termination.
    
• Delays or refusal from the landowner to cooperate can stall or kill financing.
  

4. Restrictions in the Lease Agreement

• Leases that limit:
  
  • Assignment or transfer of rights
    
  • Leasehold mortgageability
    
  • Structural alterations or changes in use
    
• These restrictions may make the project ineligible for institutional financing.
  
• Ambiguous clauses or the absence of clear reversion, escalation, or termination conditions also increase lender risk.
  

5. Higher Interest Rates and Equity Requirements

• Due to added risk, lenders may offer:
  
  • Lower loan-to-value (LTV) ratios, often 50–60% vs. 70–80% for owned land
    
  • Higher interest spreads over benchmark rates.
    
  • Demands for additional guarantees or collateral, including project escrow accounts or corporate guarantees
    
• This reduces internal IRR and increases the upfront equity burden on tenants.
  

To mitigate these financing hurdles, tenants should:

• Structure the lease with clear terms, a long duration, and registered rights
  
• Obtain all landowner consents before approaching lenders.
  
• Include lender-friendly provisions like step-in rights and a non-disturbance clause.s
  
• Work with banks experienced in leasehold finance, especially for institutional-grade tenants.s
  

These steps improve bankability and allow the leasehold development to compete favorably with fee-simple projects in both debt and equity markets.