How to use
Use this framework before approaching the leasehold debt market. Compute leasehold NOI net of ground rent, apply LTLV caps 5 to 15 percentage points below comparable fee-simple LTV, confirm residual term exceeds loan maturity by the rating-agency cushion, and stress for the next rent reset. Educational only, engage placement counsel and a leasehold-experienced lender on every deal.
Step 1. Compute leasehold NOI
Property NOI minus contractual ground rent equals leasehold NOI. Lender DSCR sizing keys off leasehold NOI, not property-level NOI. Misstating leasehold vs. property NOI in OM materials is a frequent lender / placement-firm pushback at the term-sheet stage.
Worked example: $5M property NOI, $1M annual ground rent, 2.5% CPI escalation.
| Year | Property NOI | Ground rent (2.5% escalation) | Leasehold NOI |
|---|---|---|---|
| 1 | $5,000,000 | $1,000,000 | $4,000,000 |
| 3 | $5,303,000 | $1,051,000 | $4,252,000 |
| 5 | $5,624,000 | $1,103,800 | $4,520,200 |
| 7 | $5,964,000 | $1,159,400 | $4,804,600 |
| 10 | $6,499,000 | $1,247,400 | $5,251,600 |
Step 2. Apply LTLV cap
Loan-to-leasehold-value (LTLV) is computed against value derived from the leasehold cash flow, not combined-fee value. Caps run 5 to 15 percentage points below comparable fee-simple LTV depending on lease structure quality, residual term, and reset visibility.
Illustrative LTLV vs. fee-simple LTV by structure quality.
| Structure | Fee-simple LTV | LTLV cap | Cushion |
|---|---|---|---|
| Modern 99-yr, CPI-capped, no near-term reset | 65% | 60% | 5 pp |
| Bespoke long-dated lease, 50+ yr residual, fixed escalation | 65% | 55% | 10 pp |
| Legacy lease, 30 to 50 yr residual, FMV reset within 15 yrs | 65% | 50% | 15 pp |
| Public-land lease (NPS / authority) with full protection package | 65% | 55% to 60% | 5 to 10 pp |
Step 3. Test leasehold DSCR
Apply the loan amount, rate, and amortization to test leasehold-NOI DSCR. Lender DSCR floors on leasehold financings typically run 1.20x to 1.30x in stable-asset programs; bridge / transitional programs may accept 1.10x to 1.20x with reserves.
- Compute annual debt service at the proposed loan amount, rate, and amortization.
- DSCR = leasehold NOI ÷ annual debt service. Confirm against lender's published floor for the program.
- Stress test: rate +100 bps and ground-rent escalation at cap. If DSCR drops below floor under stress, reduce loan amount or extend amortization.
- Watch maturity-DSCR: at refinance, leasehold NOI may have grown but ground rent has escalated; net effect can compress DSCR over time.
Step 4. Residual-term cushion test
Rating-agency criteria typically require remaining ground lease term to exceed loan maturity by a defined cushion. Size the loan to fit within the cushion or restructure the underlying ground lease to extend the term.
Typical residual-term cushion above loan maturity by structure.
| Loan program | Loan term | Cushion required | Min. residual term |
|---|---|---|---|
| CMBS conduit (10-yr fixed) | 10 yr | 20 to 30 yr | 30 to 40 yr |
| Agency multifamily (10-yr / 15-yr) | 10 to 15 yr | 10 to 20 yr | 20 to 35 yr |
| Life-co perm (5 to 10 yr) | 5 to 10 yr | 10 to 20 yr | 15 to 30 yr |
| Bridge / debt fund (3 to 5 yr + ext.) | 3 to 5 yr | 10 to 15 yr | 13 to 20 yr |
Step 5. Rent-reset stress
Model the next rent reset that falls within or shortly after loan maturity. Fixed and CPI escalations modeled directly; FMV resets stressed as a discrete shock against current land value.
- Fixed escalation: model the contractual step at the next reset date; recompute leasehold NOI and DSCR.
- CPI escalation: stress at the contractual cap (e.g., 3.0%) on maturity-DSCR; model the floor on operating-period coverage.
- FMV reset: estimate land value at reset using current land comps + reasonable appreciation; recompute leasehold NOI and DSCR. If DSCR falls below floor, structure a reserve or restructure the underlying lease to a CPI-capped form before approaching the debt market.
- Public-land lease step-ups: confirm the authority's published reset schedule and methodology; engage public-land-experienced counsel.
Cross-asset application notes
Sizing approach is consistent across asset types; lender options, sizing floors, and structural overlays differ.
- Hospitality: CMBS hospitality conduits, hospitality-experienced life-co, and hospitality bridge lenders. Tighter DSCR floors on volatile NOI; CPI-capped escalation strongly preferred.
- BTR / SFR: agency multifamily (Fannie / Freddie) finance ground-leased BTR with the leasehold-mortgagee protection package; residual lease term + 30-year maturity cushion standard.
- Data centers: 99-year ground leases standard; hyperscaler tenant credit absorbs leasehold structure risk; specialty data-center lenders.
- Adaptive reuse / office-to-residential: ground leases on legacy CBD office sites converting to residential; conversion-construction lender + post-conversion permanent lender both apply leasehold protections.
- Sale-leaseback comparison: ground lease covers land only; sale-leaseback covers entire fee. Tax / control / financeability / accounting treatment differs materially.