Definition
A leasehold interest is the right to use and occupy real property for a defined period under a lease agreement. The leaseholder (tenant) does not own the land or building, but holds contractual rights to possess and use it.
Leasehold vs. Fee Simple
- Leasehold: Temporary right of possession under a lease.
- Fee Simple: Full ownership of land and improvements without time limitation.
Common Contexts
- Ground leases
- Long-term commercial leases
- Retail or office tenants with build-outs
- Hotel and institutional land arrangements
Valuation Considerations
- Remaining lease term length
- Ground rent obligations
- Rent escalation clauses
- Reversion rights at expiration
- Ability to assign or finance the leasehold interest
Example
A developer signs a 60-year ground lease and constructs a mixed-use building on the land.
The developer owns the improvements during the lease term, but the land remains owned by the lessor. At expiration, the property may revert to the landowner.
Financing Implications
Lenders evaluate leasehold interests differently from fee-simple ownership. Key underwriting factors include:
- Remaining lease duration relative to loan term
- Subordination provisions
- Ground lease payment priority
- Default and cure rights
Risks
- Expiration and reversion risk
- Ground rent escalation burden
- Limited flexibility compared to ownership
- Complex refinance considerations
Investor Perspective
Leasehold interests may trade at different cap rates than fee-simple assets due to time limitation and structural complexity. Investors must carefully model long-term economics and residual value.