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B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates (08/07/2019)


This topic contains information on leasehold estates, including:


Leasehold Estates

Fannie Mae purchases or securitizes fixed-rate and adjustable-rate first-lien loans that are secured by properties on leasehold estates in areas in which this type of property ownership has received market acceptance. Mortgages secured by manufactured homes located on leasehold estates are not eligible unless the property is in a condo or PUD project approved by Fannie Mae’s Project Eligibility Review Service. The mortgage must be secured by the property improvements and the borrower’s leasehold interest in the land.

The leasehold estate and the improvements must

  • constitute real property,

  • be subject to the mortgage lien, and

  • be insured by the lender’s title policy.

The leasehold estate and the mortgage must not be impaired by any merger of title between the lessor and lessee. In the event the mortgage is secured by a sublease of a leasehold estate, the documents must provide that a default under the leasehold estate will not by such default result in the termination of the sublease.

For leasehold appraisal requirements, see B4-1.4-05, Leasehold Interests Appraisal Requirements.


Lease Requirements

The lender must ensure compliance with all requirements for leases associated with leasehold estate loans. In addition, the lender agrees that in accordance with A2-2-07, Life-of-Loan Representations and Warranties, any failure to comply at any time with the lease requirements in the following table is a breach of the life-of-loan representations and warranties if it impacts first-lien enforceability.

Lease and Lender Requirements
  The term of the leasehold estate must run for at least five years beyond the maturity date of the loan, unless fee simple title will vest at an earlier date in the borrower.
  The lease must provide that the leasehold can be assigned, transferred, mortgaged, and sublet an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor. The lessor may not require a credit review or impose other qualifying criteria on any assignee, transferee, mortgagee, or sublessee.
  The lease must provide for the borrower to retain voting rights in any homeowners’ association.
  The lease must provide that in addition to the obligation to pay lease rents, the borrower will pay taxes, insurance, and homeowners’ association dues (if applicable), related to the land in addition to those they are paying on the improvements.
  The lease must be valid, in good standing, and in full force and effect in all respects.
  The lease must not include any default provisions that could give rise to forfeiture or termination of the lease, except for nonpayment of the lease rents.
  The lease must include provisions to protect the mortgagee’s interests in the event of a property condemnation.
  The loan must be serviced in compliance with the leasehold servicing requirements in the Servicing Guide.

The lease must provide lenders with

  • the right to receive a minimum of 30 days’ notice of any default by the borrower, and

  • the option to either cure the default or take over the borrower’s rights under the lease.


Additional Eligibility Requirements

The following requirements must be met before a lender can deliver leasehold estate loans to Fannie Mae for purchase or securitization:

  • All lease rents, other payments, or assessments that have become due must be paid.

  • The borrower must not be in default under any other provision of the lease nor may such a default have been claimed by the lessor.


Option to Purchase Fee Interest

The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. If the option is included, the purchase must be at the borrower’s sole option, and there can be no time limit within which the option must be exercised. If the option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold. Both the lease and the option to purchase must be assignable.

The table below provides the requirements for establishing the purchase price of the land.

Status of Property Improvements Purchase Price of Land
Already constructed at the time the lease is executed. The initial purchase price should be established as the appraised value of the land on the date the lease is executed.
Already constructed at the time the lease is executed, and the lease is tied to an external index, such as the Consumer Price Index (CPI).

The initial land rent should be established as a percentage of the appraised value of the land on the date that the lease is executed.

The purchase price may be adjusted annually during the term of the lease to reflect the percentage increase or decrease in the index from the preceding year.

Leases may be offered with or without a limitation on increases or decreases in the rent payments.

Will be constructed after the lease is executed.

The purchase price of the land should be the lower of the following:

  • the current appraised value of the land, or

  • the amount that results when the percentage of the total original appraised value that represented the land alone is applied to the current appraised value of the land and improvements.

For example, assume that the total original appraised value for a property was $160,000, and the land alone was valued at $40,000 (thus representing 25% of the total appraised value). If the current appraised value is $225,000, $50,000 for land and $175,000 for improvements, the purchase price would be $50,000 (the current appraised value of the land, because it is less than 25% of $225,000).

Note: If the lease is tied to an external index, the initial land value may not exceed 40% of the combined appraised value of the land and improvements.


Exception to Leasehold Requirements for High LTV Refinance Loans

High LTV refinance loans that are secured by leasehold estates are not subject to all of the requirements in this topic. The term of the leasehold must run for at least five years beyond the maturity date of the loan, unless fee simple title will vest at an earlier date in the borrower. The lender is not required to perform any additional review of the leasehold terms. See also B5-7-01, High LTV Refinance Loan and Borrower Eligibility.


Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2019-07 August 07, 2019
Announcement SEL-2019-02 March 06, 2019
Announcement SEL-2018-05 June 05, 2018

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