How do ground lease rent resets affect leasehold financing?

The three reset structures and how leasehold lenders treat each

Fixed escalation: rent steps by a defined percentage (e.g., 2.0% to 2.5% annually, or a 10% step every five years). Cleanly underwriteable; lender models the forward rent and stresses for DSCR. The simplest structure to finance long-dated.

CPI escalation: rent indexed to CPI, sometimes with a floor and cap. Lender stress: assume the cap on escalation when underwriting maturity DSCR; assume the floor on operating-period coverage. CPI structures are common on ground-up new ground leases (modern structure).

Fair-market-value (FMV) reappraisal: rent reset to a percentage of fair market land value as appraised at defined dates (often every 25 years on legacy 99-year ground leases). The hardest structure to underwrite: a single reset can multiply rent 3x to 10x on a long-dated lease where land value has appreciated materially.

Lender treatment of FMV resets: leasehold mortgagees typically require either (a) a maturity buffer well before the next FMV reset date, with refinancing or restructuring planned to clear the reset, (b) an FMV cap or formula negotiated into the underlying lease that limits the per-reset increase, or (c) a sizing reserve funded over the lease term to absorb the reset shock. Each approach has materially different sponsor economics.

Modern ground leases typically use CPI escalation with caps (often 3.0%) plus an FMV reset only at very long-dated milestones (50+ years). This is materially more financeable than legacy Manhattan-style ground leases with 25-year FMV resets and is part of why the modern structure has expanded financeable supply.