Pad - Ground Tenant Type

Definition: Pad - Ground Tenant Type

In the context of commercial mortgages and real estate, a Pad - Ground Tenant refers to a specific leasing arrangement where a tenant (often a high-credit national brand) leases a standalone parcel of land—commonly known as a "pad site"—located within the perimeter of a larger commercial development, such as a shopping center or mall. Unlike a standard retail lease, the tenant is leasing only the vacant land and is responsible for financing and constructing their own building on that site.

Detailed Description

The "Pad - Ground Tenant" model is a distinct asset class in commercial finance because of the way ownership and responsibilities are partitioned between the landlord and the tenant. Below are the key characteristics of this tenant type from a commercial mortgage perspective:

• Lease Structure: These are typically Ground Leases, which are long-term agreements often ranging from 20 to 99 years. These leases are almost always Absolute Triple Net (NNN), meaning the tenant is responsible for all expenses, including property taxes, insurance, and all maintenance of the structure they build.
• Physical Placement: Pad sites are usually situated at the "outparcels" of a development, offering high visibility and direct access to main roads. Common examples of Pad Ground Tenants include fast-food restaurants, banks, pharmacies, and automotive service centers.
• Ownership Interest: In a mortgage context, the lender must distinguish between the Fee Simple interest (the owner of the land) and the Leasehold interest (the tenant who owns the building). If the borrower is the landlord, the mortgage is secured by the land and the rights to the rental income. If the borrower is the tenant, the mortgage is secured by the building and the remaining years on the lease.
• Credit Quality: Lenders view Pad Ground Tenants as highly desirable because they are frequently "credit tenants"—large, publicly traded corporations with strong financial backing. This reduces the risk of default and often allows the property owner to secure more favorable financing terms.
• Reversionary Rights: A unique feature of this tenant type is that at the expiration of the ground lease, the ownership of the building and any improvements made by the tenant typically reverts to the landlord at no additional cost.
• Valuation Stability: Because the tenant has invested significant capital to build their own structure, they are much less likely to vacate the premises compared to an inline retail tenant. This creates a highly stable, predictable cash flow that is attractive for Commercial Mortgage-Backed Securities (CMBS) and life insurance company lenders.

For underwriters, the primary focus when evaluating a Pad - Ground Tenant is the duration of the lease term relative to the loan term. Lenders generally require the lease to extend several years beyond the maturity of the mortgage to ensure the collateral remains income-producing throughout the life of the loan.