B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates (11/06/2024)

Fannie Mae purchases or securitizes loans that are secured by properties subject to leasehold estates in areas in which this type of property ownership has received market acceptance. 

Eligible property types are:

• one- to four-unit properties,

• condo units,

• co-op units,

• PUD units,

• manufactured homes located in a condo or PUD project approved by Fannie Mae's Project Review Eligibility Service (PERS). See  B4-2.2-06, Project Eligibility Review Service (PERS)B4-2.2-06, Project Eligibility Review Service (PERS).

A loan secured by a unit in a project that is subject to a ground lease is considered a loan secured by a leasehold estate for purposes of this topic. For these loans, lenders must also comply with all legal and eligibility requirements for condos, co-ops, and PUDs. See Chapter B4-2, Project Standards, for additional information.

The following definitions apply to this topic:

• A loan secured by a leasehold estate is also known as a "leasehold mortgage."
• The term "lease" includes any form of lease or ground lease (for example, a master lease, business lease, sublease, or unit lease), together with any addendum, amendment, or rider, or a memorandum thereof.
• The terms "lessor" and "lessee" includes sublessor and sublessee.
• For loans secured by units in projects subject to a ground lease:
  • The borrower may also be called the "unit lessee," "unit mortgagor," or "unit owner."
  • The "ground lease" may also be called a "land lease" or "underlying lease."
  • For co-ops, this topic does not apply to a borrower's "proprietary lease" or "occupancy agreement."
  • For a loan secured by a unit in a project, the term "lender" does not refer to the project's blanket lender or blanket mortgagee, if applicable.

The lender must comply with all requirements for leasehold mortgages. In addition, the lender agrees that in accordance with A2-2-07, Life-of-Loan Representations and WarrantiesA2-2-07, Life-of-Loan Representations and Warranties, any failure to comply at any time with requirements in this topic is a breach of the life-of-loan representations and warranties if it impacts first-lien enforceability.

The following table provides general requirements for leasehold mortgages.

The lender must ensure all leases associated with the subject property, regardless of the form of the lease (including a master lease, sublease, or unit lease) comply with the requirements below. The lessee (or sublessee, when applicable) must be the borrower, condo or PUD homeowners' association (HOA) or the co-op corporation. For manufactured homes located in a condo or PUD project approved by PERS, the HOA must be the lessee without any further sublessees.

Compliance with these lease requirements may be satisfied by:

• separate agreement(s) incorporated into the lease (e.g., addendum, amendment, or rider), or
• the project's constituent documents (project documents) (e.g., for co-ops, the Recognition Agreement or other agreement).

Note: For units in projects subject to a ground lease in which the HOA or co-op corporation is the lessee, the lender must ensure the lease complies with these lease requirements unless the project has been approved by Fannie Mae in Condo Project Manager (CPM).

Regardless of the lessee, the lender must ensure the terms of the lease address all of the following:

• The lease must have an unexpired term that exceeds the maturity date of the loan by five (5) years or more.
• The lease must not preclude the borrower's membership or voting rights in the HOA or co-op corporation, as applicable.
• If the loan is secured by a sublease, a default under the master lease will not automatically result in the termination of the sublease.

The following table provides additional lease requirements depending on whether the borrower or the HOA or co-op corporation is the lessee.

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, together, subject to permissible restrictions noted above.

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

Leasehold estates granted by community land trusts and high LTV refinance loans secured by leasehold estates are not subject to the requirements in this topic. See  B5-5.3-02, Shared Equity Transactions: General Requirements B5-5.3-02, Shared Equity Transactions: General Requirements ,  B5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral RequirementsB5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral Requirements  and B5-7-01, High LTV Refinance Loan and Borrower EligibilityB5-7-01, High LTV Refinance Loan and Borrower Eligibility  for additional information.