A leasehold estate mortgage provides financing by using the borrower’s leasehold interest in property as collateral instead of full ownership (fee simple). It applies when a tenant has a long-term lease—commonly 50, 75, or 99 years—allowing them to use land owned by a landlord (lessor) while owning any structures on it.
This mortgage typically involves three parties:
- The Landowner (Lessor), who owns the land outright and collects ground rent.
- The Tenant (Lessee), who leases the land, owns the improvements, and seeks financing.
- The Lender, who loans money secured by the tenant’s leasehold interest.
Unlike traditional mortgages where both land and buildings serve as collateral, in a leasehold mortgage the lender’s security is the lease contract. Therefore, lenders require the lease term to outlast the mortgage term sufficiently to reduce risk.
Compared to a standard fee simple estate (where you own land and property indefinitely), a leasehold estate limits ownership rights to the lease duration. At lease expiration, both land and improvements often revert to the landowner, which impacts property value and financing.
Leasehold mortgages are commonly used by commercial developers building on leased land and by businesses or homeowners in locations where land ownership is restricted or prohibitively expensive—such as parts of Hawaii, Florida, or New York City.
Borrowers should be aware of special risks: ground lease violations can terminate the lease and mortgage, refinancing may be harder due to lender caution, and resale value can decline as the lease approaches expiration. Lenders may seek non-disturbance agreements to protect their interests in case of borrower default on lease terms.
For those considering this type of mortgage, consulting with a real estate attorney experienced in leasehold arrangements is essential to understand contractual obligations and legal ramifications.
Learn more about related mortgage types such as the Primary Mortgage Market and concepts like Leasehold Improvements that may impact leasehold financing decisions.
For authoritative information on leasehold estates, visit Investopedia’s Leasehold Definition and for lender perspectives, see First American’s guide on Untangling the Leasehold Mortgage Puzzle.