Defining Terms of Leasehold Estate Properties

Defining Leasehold

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.

Defining Leasehold

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).

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.

Definitions

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.

Terms of Lease

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

The lease must not include any default provision that could result in forfeiture or termination of the lease, unless the lease provides the lender with:

·         the right to receive notice of any default under the lease, and

·         at least 30 days, at the lender’s option, to either cure the default, take over the lessee’s rights under the lease or commence foreclosure

·         Note: If the property is located in Maryland, it is exempt from this requirement if applicable state law provides for the registration of residential leases with the state and requires the lessor to send written notice of default under the lease to the lender at least 30 days prior to the lessor filing an action for possession.

Note: For loans sold to Fannie Mae with new leases entered into on or after Sept. 01, 2025:

• The fee estate must not be subject to any prior secured loans or other liens, unless the secured party or lienholder has agreed to recognize and not disturb the lease if it becomes the owner of the fee estate, as evidenced by an agreement recorded in the appropriate land records.

Lease Requirements if the HOA is the Lessee

·         No lease requirements relating to assignments, transfers, subleases or mortgages.

·         See B4-2.2-03, Full Review: Additional Eligibility Requirements for Units in New and Newly Converted Condo Projects and B4-2.3-03, Legal Requirements for Co-op Projects.

·         The lease or project documents must provide that the lender receives notice of any lessee default under the lease not more than 30 days after such default, and at least 30 days' prior notice of termination of the ground lease.

·         No lease requirements relating to extinguishment or impairment of the lessee's leasehold estate.

Neighborhood Section of the Appraisal Report

However, when a segmented or bifurcated market is present, the One-Unit Housing Trends portion must reflect those properties from the same segment of the market as the property being appraised. This ensures that the analysis being performed is based on competitive properties. For example, if the neighborhood contains a mix of property types not considered competitive by market participants, then a segmented or bifurcated market is present. The appraiser should also provide commentary on the other segment(s) of the neighborhood when segmentation is present.

However, when a segmented or bifurcated market is present, the One-Unit Housing Trends portion must reflect those properties from the same segment of the market as the property being appraised. This ensures that the analysis being performed is based on competitive properties. For example, if the neighborhood contains a mix of property types not considered competitive by market participants, then a segmented or bifurcated market is present. The appraiser should also provide commentary on the other segment(s) of the neighborhood when segmentation is present.

The appraiser's analysis of the property value housing trend section (increasing, stable, declining) must include factual data from information sources such as, but not limited to, market data, home price indices, multiple listing services, public records, and/or models. The trend indicated in the appraisal report must reflect the overall movement of the market based on a minimum of 12 months of data.

Comparable Sales for Appraisals

The appraiser is responsible for determining which comparables are the best and most appropriate for the assignment. Fannie Mae expects the appraiser to account for all factors that affect value when completing the analysis. Comparable sales should have similar physical and legal characteristics when compared to the subject property. These characteristics include, but are not limited to, site, room count, gross living area, style, and condition. This does not mean that the comparable must be identical to the subject property, but it should be competitive and appeal to the same market participants that would also consider purchasing the subject property. Comparables that are significantly different from the subject property may be acceptable; however, the appraiser must describe the differences, consider these factors in the market value, and provide an explanation justifying the use of the comparable(s).

The date of sale and the time adjustment (market conditions) are critical elements in determining an accurate value because the appraisal is based on a specific date in time (effective date of appraisal). The comparable sales being considered must be analyzed by the appraiser to determine if there have been any changes in market conditions from the time the comparable went under contract to the effective date of the appraisal. This analysis will determine whether a time adjustment is warranted. Adjustments may be either positive or negative depending on the market changes over the time period analyzed. Time adjustments should be supported by other comparables (such as sales, contracts) whenever possible; however, in all instances the appraiser must provide an explanation for the time adjustment in the appraisal report.

The appraiser is responsible for determining which comparables are the best and most appropriate for the assignment. Fannie Mae expects the appraiser to account for all factors that affect value when completing the analysis. Comparable sales should have similar physical and legal characteristics when compared to the subject property. These characteristics include, but are not limited to, site, room count, gross living area, style, and condition. This does not mean that the comparable must be identical to the subject property, but it should be competitive and appeal to the same market participants that would also consider purchasing the subject property. Comparables that are significantly different from the subject property may be acceptable; however, the appraiser must describe the differences, consider these factors in the market value, and provide an explanation justifying the use of the comparable(s). External factors, including Federal Emergency Management Agency (FEMA) designated flood zone, should be given consideration when selecting comparables.

When choosing comparable sales, the appraiser should examine the market area of the subject property, assess its characteristics, and identify similar comparable sales. Market area is defined as the geographic region, for a subject property, from which most demand comes and in which most of the competition is located. This does not mean comparable sales must be identical to the subject property, but instead should be competitive and appeal to the same market participants that would also consider purchasing the subject property. If the available comparable sales are not similar, the appraiser needs to decide whether an expansion of the market area search is appropriate. If this occurs, the appraiser must provide commentary to explain the rationale for selecting comparable sales outside the subject's market area and make location adjustments if warranted.

NOTE: Neighborhood is now defined in Fannie Mae Glossary as a congruous group of complementary land uses.

Adjustments to Comparable Sales

Adjustments may be either positive or negative depending on the market changes over the time period analyzed. Time adjustments should be supported by other comparables (such as sales, contracts) whenever possible; however, in all instances the appraiser must provide an explanation for the time adjustment in the appraisal report.

Adjustments may be either positive or negative depending on the market changes over the time period analyzed. Time adjustments should be supported by other comparables (such as sales, contracts) whenever possible; however, in all instances the appraiser must provide an explanation for the time adjustment in the appraisal report. A specific time adjustment to a comparable sale(s) may differ from the identified market trend since the determination of whether an adjustment is made to a comparable sale is based on market changes between the contract date of the comparable sale and the effective date of the appraisal. For example, the 12-month value trend may indicate a positive overall trend, however it's possible the market was stable (or declining) between the time period of the contract date of the comparable and the effective date of the appraisal. Comparable(s) sales with a contract date that is recent in relation to the effective date of the appraisal will likely not have a time adjustment given the inability to identify a change in the market. The appraisal report must contain the market analysis that supports the indicated market trends, and any adjustments made for market conditions.