Fannie Mae Selling Guide B2-3-03 — Special Property Eligibility and Underwriting Considerations: Leasehold Estates

Fannie Mae Selling Guide B2-3-03 — Special Property Eligibility and Underwriting Considerations: Leasehold Estates

B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates (06/04/2025) Introduction This topic contains information on leasehold estates, including: Leasehold Estates Definitions General Requirements for Leasehold Mortgages Lease Requirements Borrower's Option to Purchase Fee Interest Exceptions to Leasehold Requirements Uniform Appraisal Dataset (UAD) 3.6 Policy Leasehold Estates 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 Published May 6, 2026 251 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. General Requirements for Leasehold Mortgages 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 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. ✓ Requirements for Leasehold Mortgages The loan must be secured by a first lien in the property improvements and the borrower's rights in the leasehold interest in the land. For co-op share loans, see B4-2.3-03, Legal Requirements for Co-op Projects and B4-2.3-04, Loan Eligibility for Co-op Share Loans. 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. The lease estate and the improvements must constitute real property and be subject to the mortgage lien. For co-op share loans, see B4-2.3-03, Legal Requirements for Co-op Projects. Published May 6, 2026 252 ✓ Requirements for Leasehold Mortgages The appraisal must meet the requirements in B4-1.4-05, Leasehold Interests Appraisal Requirements. The loan must meet the applicable title insurance requirements in B7-2-04, Special Title Insurance Coverage Considerations. All rents, other payments, or assessments under the lease that have become due must be paid. The lease must not be in default under any provision of the lease and the lessor must not have claimed any such default. The lease must be recorded in the appropriate land records. The lease must be in full force and effect, and enforceable in all respects. Lease Requirements 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. Published May 6, 2026 253 The following table provides additional lease requirements depending on whether the borrower or the HOA or co-op corporation is the lessee. Lease Requirements if the Borrower is the Lessee Lease Requirements if the HOA or Co-op Corporation is the Lessee The lease must allow the lease for it (including the lessee's option to purchase) to be assigned, transferred, mortgaged, and subleased an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor. The lease must not require a credit review or impose other qualifying criteria on any assignee, transferee, mortgagee, or sublessee. The lease may include the following restrictions, if applicable: • requirements related to Bureau of Indian Affairs (BIA) for leasehold mortgages on tribal lands, including approval of BIA and lessor. • limitations in accordance and compliance with .B5-5.2-01, Loans With Resale Restrictions: General Information No lease requirements relating to assignments, transfers, subleases or mortgages. The lease must provide protection of the lender's financial interests in the event of a condemnation or similar taking proceeding. Note: If the lease provisions are silent or insufficient, the lender may rely on applicable state law or other written agreement that provides substantially the same protections. 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 must not include any default provisions that could result in forfeiture or termination of the lease, unless the lease provides the lender with: • the right to receive notice of any lessee 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. 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. Published May 6, 2026 254 Lease Requirements if the Borrower is the Lessee Lease Requirements if the HOA or Co-op Corporation is the Lessee The lease must not include any provisions that allow the leasehold estate to be extinguished or otherwise impaired by any merger of title between the lessor and lessee without the lender's prior consent. No lease requirements relating to extinguishment or impairment of the lessee's leasehold estate. Borrower's 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, together, subject to permissible restrictions noted above. The following table provides 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. Published May 6, 2026 255 Status of Property Improvements Purchase Price of Land 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. Exceptions to Leasehold Requirements 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 , B5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral Requirements and B5-7-01, High LTV Refinance Loan and Borrower Eligibility for additional information. Uniform Appraisal Dataset (UAD) 3.6 Policy Lenders using UAD 3.6 must follow the requirements in the UAD 3.6 Policy Supplement. Recent Related Announcements The table below provides references to recently issued Announcements that are related to this topic. Announcements Issue Date Announcement SEL-2025-04 June 04, 2025 Published May 6, 2026 256 Announcements Issue Date Announcement SEL-2024-07 November 06, 2024 Announcement SEL-2019-07 August 07, 2019 Announcement SEL-2019-02 March 06, 2019

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