A leasehold mortgage is like any other mortgage, but it's secured by a lease of property rather than by ownership of property. These types of loans are common in commercial real estate where stores or buildings may be located on leased land. They're also used in residential real estate in areas that have leased land like Palm Springs, California, Hawaii and Rehoboth-By-the-Sea, Delaware.
While most people think of a mortgage as a home loan, it's actually just a part of your home loan. The actual loan is a document called a promissory note that spells out exactly how you will pay the bank back their money. The promissory note gives the bank the permission to take the collateral -- your house -- if you don't pay them. To make it easier for your bank to take your house if you don't pay them, you also give them a mortgage or, in some areas, a trust deed. Mortgages and trust deeds are separate documents that get attached to your property's ownership record. They basically say that if you don't pay your promissory note, the ownership of the property reverts to the bank.
A leasehold interest usually gives you the same rights on a piece of land as the owner -- with two important differences. First, the lease ends someday, and at that point, the owner gets her land back if you can't work out a renewal with her. Second, you have to pay the owner periodically for the use of her property. Other than that, you can enter and exit your land freely, invite friends over or throw them out and sell your rights under the lease to a third party. Furthermore, most land leases are relatively long-term. While you might rent a car for a weekend or an apartment for a year, many land leases start out with a 99-year term.
Leasehold vs. Fee
When you take out a mortgage on a property that includes the land and you don't pay, the bank gets your land, your house and the responsibilities that go along with it, like paying the property taxes. With a leasehold mortgage, the same thing happens: The bank gets your house and your lease -- with the responsibilities that go with it. Everything is the same as a mortgage on a regular property that includes land, also known as a "fee simple" property, except that the bank has to make lease payments to hold onto the land in addition to paying property taxes on the building.
Lease vs. Loan Length
The fact that leaseholds end eventually creates a challenge in placing a leasehold mortgages. When a bank decides whether or not to make a loan, its most important consideration is whether or not it will get paid back. If, for example, you have 20 years left on your leasehold, there's almost no chance that you'd continue paying for the last 10 years of a 30-year mortgage since, at that point, you wouldn't have the use of the property any more. They bank also wouldn't have anything to foreclose. As such, leasehold mortgages are usually set up to have a shorter term than the lease, giving the bank a cushion of time. To get a 30-year mortgage, lenders will typically require that you have at least 35 or 40 years left on your lease. They may also charge more for a leasehold mortgage, since there is an additional measure of risk and complexity with a leasehold property that comes from having a landlord between you and the bank.
- Mondaq: United States: Leasehold Finance: A Powerful Tool
- Tor Buck, Realtor: What is Indian Lease Land?
- KonaRealEstateAgent.com: Leasehold vs. Fee Simple
- Coastal Homes in Delaware: Leased Land in Rehoboth By The Sea
- Alper Law: Understanding a Mortgage and a Promissory Note
- Pepper Hamilton LLP Attorneys at Law: It’s Complicated: Leasehold Mortgages and the Relationships Between Tenants, Landlords and Their Lenders
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