subordinated ground lease

subordinated ground lease

An agreement by a property owner in a ground lease situation to allow the tenant's construction lender to have superior rights to the land.The ground lease tenant often builds improvements on the rented land. If those improvements are made with borrowed money,the lender can take a mortgage only on what the tenant owns—the lease rights,not the land itself.If the lender forecloses on the leaseheld interest,it must continue paying rent to the property owner or risk loss of the lease and the improvements.This is generally unacceptable to a lender. It will require the property owner to put the land up as additional collateral for the loan—subordinate the ground lease to the mortgage.In other words,if the lender forecloses,it may take the land and the improvements. Property owners who agree to subordinated ground leases generally obtain higher-than-market rent for their land,to compensate for their increased risk.

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Given that increased yield is based on increased risk, an unsubordinated ground lease (with lower risk to the landlord) would carry a lower land-lease rate than a subordinated ground lease, all other factors being equal.