Legal Definitions - leasehold mortgage

A leasehold mortgage is a type of loan where the borrower uses their interest in a long-term lease agreement as collateral. Instead of owning the land outright (known as "fee simple" ownership), the borrower has the right to use and occupy the property for a specific period under a lease. When a leasehold mortgage is granted, the lender's security for the loan is this leasehold interest.

If the borrower fails to repay the loan, the lender can foreclose on the leasehold interest, effectively stepping into the borrower's shoes as the tenant, rather than taking ownership of the underlying land itself. This type of mortgage is common when financing improvements on leased land or purchasing an existing leasehold interest.

Here are some examples:

• Commercial Development: A restaurant chain wants to build a new location in a prime urban area. Instead of buying the land, they secure a 75-year ground lease for a vacant lot. To finance the construction of the restaurant building, they obtain a leasehold mortgage. The bank's security for this loan is the restaurant chain's right to occupy and use the land for 75 years under the lease, along with the building constructed on it. If the restaurant defaults, the bank can take over the lease and the building, but not the underlying ownership of the land.

• Residential Co-op on Leased Land: In a major city, a cooperative apartment building is built on land that the co-op corporation leases from a private landowner for 99 years. An individual wishes to purchase shares in the co-op, which grants them the right to occupy a specific apartment unit. To finance this purchase, the individual obtains a leasehold mortgage. The lender's collateral is the buyer's leasehold interest in their specific apartment unit and their share in the co-op's master lease with the landowner. The lender does not have a claim on the underlying land itself, only on the buyer's rights as a tenant-shareholder.

• Renewable Energy Project: A solar energy company plans to develop a large solar farm. They enter into a 50-year lease agreement with a farmer to use a vast tract of land for installing solar panels. To fund the significant costs of purchasing and installing the solar panels and related infrastructure, the company secures a leasehold mortgage. The lender's security is the solar company's long-term right to use the land for solar energy generation under the lease agreement, along with the equipment installed on it. If the company defaults, the lender can assume the lease and operate or sell the solar farm, but the farmer retains ownership of the land.