Financing on Leased Land

[beanmaestro]

I have an unusual opportunity that requires a lot of research, but it occurs to me to ask for wisdom here, too…

So, a friend of a friend has inherited a federal land grant plot up near Santa Barbara. The land in question was granted in exchange for a Chumash village that the gov’t absorbed. Interestingly, it is not tribal land, but was granted to the cheif’s family… We’re doing research into the details, but it appears that this land can be inherited or leased, but not sold. It also appears that the land is exempt from property taxes and building codes, so paying a moderate rent for a 99-year lease is still a pretty good deal.

So here’s the question:
Is there any hope of borrowing money to build on leased land like this? If so, what sort of LTV is doable? It’s on the side of a mountain, so building costs will not be cheap.

[Bugs]

There are lenders who will lend on leasehold interests, but these loans are usually kept in house; I don’t think there’s much of a secondary market for them. Look for interest rates that are higher and probably amortizations of less than 30 years. All they’re loaning on are the improvements and the right to control that site for the length of the lease. You might be looking at 10% interest rates and a 15-year amortization; and that’s in addition to the land lease payments themselves.

For instance, a $100,000 loan at 10% over 15 years would have a payment of $1,065/month; that’s in addition to the land lease payment, taxes, insurance, etc..

[Bugs]

There are lenders who will lend on leasehold interests, but these loans are usually kept in house; I don’t think there’s much of a secondary market for them. Look for interest rates that are higher and probably amortizations of less than 30 years. All they’re loaning on are the improvements and the right to control that site for the length of the lease. You might be looking at 10% interest rates and a 15-year amortization; and that’s in addition to the land lease payments themselves.

For instance, a $100,000 loan at 10% over 15 years would have a payment of $1,065/month; that’s in addition to the land lease payment, taxes, insurance, etc..

[beanmaestro]

Any thought on how much, or what LTV could be borrowed? Also, would this count as a deductible mortgage? If not, I suspect ye olde 401k loan may be a better bet.

[beanmaestro]

Any thought on how much, or what LTV could be borrowed? Also, would this count as a deductible mortgage? If not, I suspect ye olde 401k loan may be a better bet.

[Bugs]

Portfolio lenders tend to have stricter limitations on LTV because they’re going to carry and service those loans for a long time. Considering the wrinkles involved with this deal you may be looking at max LTVs as 70% or 80%. YMMV. You won’t know until you try.

[Bugs]

Portfolio lenders tend to have stricter limitations on LTV because they’re going to carry and service those loans for a long time. Considering the wrinkles involved with this deal you may be looking at max LTVs as 70% or 80%. YMMV. You won’t know until you try.

[beanmaestro]

Well, that’s better than the 50% or less I was expecting…

[beanmaestro]

Well, that’s better than the 50% or less I was expecting…

[GoUSC]

I disagree. I have developed several commercial properties on leased land and have noticed little to no different on the perm. loan rates. On a 99 year lease, there is no loss in property value after 30 years. It’s only when you get down to 20, 15, 10 years remaining on the ground lease that is becomes an issue. The last deal I did was a 30k sf retail project on a ground lease to the City of San Diego expiring in 60 years. The perm. loan rate was at market.

It might be completely different for residential housing but I doubt it. There are several residential projects in San Diego (Blackstone comes to mind) that are on long term leases that I know people have gotten typical loan rates on.

[GoUSC]

I disagree. I have developed several commercial properties on leased land and have noticed little to no different on the perm. loan rates. On a 99 year lease, there is no loss in property value after 30 years. It’s only when you get down to 20, 15, 10 years remaining on the ground lease that is becomes an issue. The last deal I did was a 30k sf retail project on a ground lease to the City of San Diego expiring in 60 years. The perm. loan rate was at market.

It might be completely different for residential housing but I doubt it. There are several residential projects in San Diego (Blackstone comes to mind) that are on long term leases that I know people have gotten typical loan rates on.

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