Land leases are financeable in CMBS as long as the land lease meets certain criteria. First, CMBS lenders prefer that the land lease payment be fixed or have modest escalation of the lease term. In addition, lenders prefer that the term of the ground lease be significantly longer than the term of the loan because the lender will want a sufficiently long period of time after foreclosure to try to recover its investment from the property. A rule of thumb is the remaining land lease term must be at least ten years longer than the proposed loan amortization. The lender will require the right to exercise any renewal options to be sure that the term will meet the objectives outlined above.
The ground lease should include an express right for the ground lessee to enter into a leasehold mortgage, pledging as security its ground lease interest in the land as well as its interest in the improvements.
Other important features of a financeable ground lease include cure rights, waivers of certain defaults and no termination of the ground lease pending foreclosure, to name a few, that are critical as well.