Underwriting a Loan Against a Leasehold Hangar

Abstract

1. Introduction

A hangar loan file often looks like an ordinary owner-occupied commercial real estate deal: a stabilized structure, a creditworthy borrower, a loan-to-value ratio inside policy. The problem is what the lien attaches to.

At a federally obligated general aviation airport the land belongs to a public sponsor and is not available to secure private debt. A hangar tenant holds a ground lease, builds improvements, and owns those improvements for the term of the lease. The interest a lender can perfect is therefore a leasehold, a contract right of finite duration, rather than a fee estate. Three features of that interest break the assumptions built into a standard real estate credit template at the same time. The collateral has a hard expiration date after which it belongs to the airport. Its value declines toward that date for reasons unrelated to the market. And it can be forfeited through a default under an agreement the lender is not party to and may not be told about.

The consequence is not that hangars are bad collateral. They are frequently strong collateral, secured by tenants with few alternatives and by a durable shortage of the asset. The consequence is that three of the numbers a credit officer relies on, the appraised value, the advance rate, and the amortization term, are each biased in the same optimistic direction unless the leasehold character of the interest is handled deliberately. Errors that all point one way compound rather than offset.

This paper works through the exposure and the defenses. Sections 2 through 4 establish the structure of the risk and quantify the term mismatch that is its most measurable component. Sections 5 and 6 address the two conditions on which recovery depends: an appraisal of the interest actually pledged, and a ground lease that permits a leasehold mortgagee to preserve and realize the collateral. Section 7 treats the Small Business Administration programs, which codify much of this discipline and are the route many hangar acquisitions take, and corrects several provisions that are commonly misdescribed in the lending literature. Section 8 compares the term standards and shows that one of them cannot be met on federally obligated land. Section 9 sets out the bank regulatory limits and Section 10 what is known about recovery. Section 11 sets out the federal overlay that sits above even a well-drafted lease. Section 12 reduces the analysis to conditions a credit officer can attach to an approval.

The intended readers are commercial credit officers, Small Business Administration lenders and certified development companies, appraisers engaged on leasehold assignments, and counsel documenting hangar loans. The paper does not address hangar valuation method, which is treated in the companion work in this series (Carter 2026a, 2026b), or the tax treatment of the reversion.

2. Where the Generic Template Fails

The standard owner-occupied real estate template assumes a durable asset: a building on land the borrower owns, whose value at any point in the loan is a function of the market rather than the calendar. A ground-leased hangar violates three of those assumptions simultaneously.

The borrower usually holds only a leasehold, so the collateral is a contract right of finite duration rather than a fee estate, and the fee is held by a public sponsor that cannot pledge it. The improvements revert to the airport at lease end, so the asset's value as security declines toward zero as expiration approaches irrespective of market conditions. And the leasehold can be forfeited if the borrower defaults under the ground lease, an event outside the loan documents that the lender may not learn of unless the lease requires separate notice to the leasehold mortgagee.

Table 1. Where the generic template misreads a ground-leased hangar

Source: Author's analysis, drawing on the authorities in Sections 5 through 11.

The Small Business Administration states the conclusion plainly in its own lending manual: "Because leasehold improvements provide minimal collateral value, the CDC must consider requiring additional collateral" (Small Business Administration 2025). That instruction is written for a certified development company, but the underlying judgment applies to any lender advancing against improvements on leased land.

3. Term Mismatch: Amortization Against Remaining Lease Term

The risk that can be quantified in advance is a maturity mismatch between the loan and the lease. A fully amortizing loan retires principal on a schedule set by its amortization term. The collateral has a hard stop at the ground lease's expiration, when the improvements revert. If the amortization term runs longer than the remaining lease term, there is a window at the end of the loan in which principal is outstanding but the collateral has already passed to the airport. That window is an unsecured tail, and its size is a function of how far the amortization outruns the lease.

The arithmetic is unforgiving because amortization is back-loaded. Early payments are mostly interest, so principal remains high well into the schedule. Table 2 sets out the outstanding balance on a $1,000,000 loan at 7.5 percent under twenty-year and twenty-five-year amortizations, at several possible reversion dates.

Table 2. Outstanding balance at reversion, $1,000,000 loan at 7.5 percent

Source: Author's calculation on a standard monthly amortization; percentages are of the original balance.

The lesson is structural rather than rate-specific. Any amortization longer than the remaining lease term leaves principal exposed when the collateral reverts, and because principal amortizes slowly at first, a five-year overrun on a twenty-five-year schedule strands more than a third of the original balance rather than a fifth of it.

The discipline that follows is to size amortization to the qualifying remaining lease term rather than to the hangar's construction quality or the borrower's preferred payment. Two subtleties govern what qualifies. The relevant term is the remaining term as of closing, net of any period already elapsed, measured to the earlier of lease expiration or the first point at which the lessor may terminate at will. Renewal options extend the countable term only where the borrower can exercise them unilaterally; an option the airport may decline, or one contingent on the sponsor's discretion, adds nothing a lender can rely on. A hangar with sixteen years left on its base term and a ten-year renewal exercisable at the airport's option has sixteen countable years, not twenty-six. Airport ground leases tend to contain exactly that kind of option.

Prudent practice adds a cushion beyond bare term matching, so the loan retires with room to spare before reversion and before the borrower must negotiate a renewal from a weak position. There is no single governing figure for commercial hangar lending. Two reference points bracket the judgment. The closest bright-line analogue is residential: the Fannie Mae Selling Guide requires that a leasehold estate "have an unexpired term that exceeds the maturity date of the loan by five (5) years or more" (Fannie Mae 2026). That is single-family guidance and is not controlling for a commercial hangar, but the principle it encodes, that the lease should outlast the loan by a margin rather than expire on the day the last payment is due, transfers. The second reference point comes from the other side of the transaction: the Federal Aviation Administration's own view is that "most tenant ground leases of 30 to 35 years are sufficient to retire a tenant's initial financing and provide a reasonable return for the tenant's development of major facilities" (Federal Aviation Administration 2026a). A lender underwriting a hangar against a lease materially shorter than that is lending against a term the regulator regards as inadequate to amortize the improvement in the first place.

4. The Reversion Clause as a Collateral-Extinguishment Schedule

The reason a maturity mismatch is fatal rather than merely untidy is the reversion clause. In a typical airport ground lease the tenant builds and owns the hangar during the term, and title to the improvements passes to the airport at expiration or termination, usually without compensation. The collateral is contractually programmed to disappear on a known date.

This recasts a familiar appraisal exercise. The reversion analysis an appraiser performs for a valuation or tax assignment is, from the lender's side of the table, a collateral-extinguishment schedule. Each year that passes moves the hangar closer to zero as security, not because the structure deteriorates but because the number of years a lender could operate, re-let, or sell it after foreclosure shrinks.

Two features of the clause deserve specific attention in credit review. The first is what triggers reversion. Expiration is predictable and can be planned around. Many leases also vest the improvements in the airport on early termination for tenant default, which means a ground-lease default can hand the collateral to the sponsor free of the lender's lien unless the lease protects the leasehold mortgagee. That is the mechanism Section 6 addresses. The second is whether any salvage or compensation is payable on reversion. Most airport ground leases provide none, so the prudent assumption is that terminal collateral value is zero rather than a depreciated cost figure.

A related feature of long airport leases compounds the exposure over time. Order 5190.6C instructs that "all leases for a term of more than five (5) years should contain provisions for periodic adjustment of rates" (Federal Aviation Administration 2026a). A lease with scheduled rent resets transfers market risk to the tenant during the loan term, which affects both debt service coverage and, as Section 5 explains, the value of the leasehold itself.

5. Valuing the Interest That Actually Secures the Loan

Because the collateral is a leasehold, the appraisal supporting the loan must value the leasehold rather than the fee simple or the leased fee. These are distinct property interests with distinct values. The bank supervisor defines all three: fee simple interest "is the ownership as unencumbered by any other interest"; leased fee interest is "an ownership interest held as a landlord (the lessor) with the rights of use and occupancy conveyed by a lease to a tenant"; and the leasehold interest is "the right held by a tenant (the lessee) for use and occupancy as conveyed by the landlord" (Office of the Comptroller of the Currency 2022, 127). For a hangar the leasehold is the right to use the improvements for the remaining term, burdened by the ground rent obligation and stripped of reversionary value. The same passage instructs that "[c]are should be taken in commissioning and reviewing the appraisal to verify that the market value of the appropriate interest is obtained and used to support the loan." As the reversion date approaches, leasehold value falls while a fee-simple valuation of the same physical hangar would hold steady. A lender advancing against a fee-simple or leased-fee appraisal is lending against value the borrower does not own.

Appraisal standards require the interest to be identified and valued as such. The Uniform Standards of Professional Appraisal Practice direct the appraiser to identify the real property interest to be valued as part of the identification of the assignment (The Appraisal Foundation 2024, Standards Rule 1-2(e)(ii)). The Interagency Appraisal and Evaluation Guidelines require that for properties subject to leases whose terms do not reflect current market conditions, "the appraisal must clearly state the ownership interest being appraised and provide a discussion of the leases that are in place," and that the appraisal analyze and report appropriate deductions and discounts (Interagency Appraisal and Evaluation Guidelines 2010, sec. VIII, 75 Fed. Reg. 77459; app. C, 75 Fed. Reg. 77470). The residential guidance is more explicit still on method, and is useful by analogy: an appraiser valuing a leasehold must provide a narrative identifying the terms, restrictions and conditions of the ground lease, discuss what effect those have on value and marketability, and, where comparables with identical lease terms are unavailable, explain the use of fee-simple sales and make adjustments in the sales comparison grid "to reflect the market reaction to the different lease terms or property rights appraised" (Fannie Mae 2025).

A credit officer reviewing a hangar appraisal should be able to confirm three things on the first pages of the report: that the interest appraised is the leasehold, that the remaining lease term and the ground rent obligation are stated, and that the comparables were adjusted for property rights rather than lifted from fee-simple hangar sales.

Two valuation wrinkles recur at airports. Where the borrower subleases part of the hangar, the interest to be valued may be a sandwich position, the borrower's leasehold net of the subtenant's rights, which is narrower than a simple leasehold. And the ground-rent structure matters in both directions: a lease at fixed rent well below market carries positive leasehold value from that spread, while a lease with escalating or market-reset rent may carry little value from rent even mid-term. One inference should be resisted, because it is common and wrong. A leasehold is not valueless merely because its rent is at market, and it is not valuable only when rent is below market. Value can arise from the improvements, the location and the remaining term as well as from a rent spread, and it is the appraisal that establishes which of those is doing the work.

What a credit officer takes from this is that leasehold loan-to-value and loan tenor both need to be tighter than the fee-simple defaults, because the base they apply to is smaller and shrinking. The supervisor says as much, and more precisely than the guidelines do. The examination handbook applies the supervisory ratios to the value of the leasehold interest itself: for a commercial property under construction the maximum is up to 80 percent of the market value of the leasehold interest, and once construction is complete 85 percent of the leasehold interest's market value (Office of the Comptroller of the Currency 2022, 128). The same page tells examiners what to expect on mortgagee protection: the lender is most secure where the landowner subordinates and grants a first lien on the land, and where that is not possible "the bank lease agreement should include provisions for a notice to the bank of tenant default under the ground lease and give the lender the right, but not the obligation, to cure any defaults."

That matters to a claim made earlier in this paper. Section 3 says no single published figure governs how far a lease must outrun a loan. For banks that is too strong. The interagency guidelines are silent on leasehold collateral, but the examination handbook is not, and it supplies a term standard, a loan-to-value base, a debt service convention and a minimum mortgagee protection. A hangar lender operating under national bank supervision has a published standard to work from; what it does not have is one written for this asset.

6. Financeability: The Provisions the Collateral Depends On

Everything above assumes the lender can realize on the leasehold if the borrower defaults. That assumption holds only where the ground lease is financeable, meaning it contains the protections a leasehold mortgagee needs to preserve the estate and take it over. An otherwise attractive hangar on an unfinanceable ground lease is close to worthless as security, because the lender cannot step in to cure, cannot foreclose cleanly, and cannot transfer the leasehold to a replacement operator. Financeability is a condition of the collateral's value rather than a documentation preference.

The protections are well settled in ground-lease practice. Stein (2003), the standard practitioner treatment, sets out the mortgagee's requirements: the right to mortgage the leasehold without the landlord's consent, an obligation on the landlord to copy the mortgagee on default notices, cure rights extended beyond the tenant's own period and adapted to defaults the mortgagee cannot reasonably cure, the right to a new lease on termination, free assignability on foreclosure, and an allocation of insurance and condemnation proceeds.

The Small Business Administration has translated the same list into mandatory loan conditions, and its formulation serves a commercial lender well as a checklist because it is short, specific and written for improvements on leased land. Where loan proceeds finance improvements on a leasehold interest in land, the agency requires that the underlying ground lease include clauses addressing the tenant's right to encumber the leasehold estate; a prohibition on modification or cancellation of the lease without the lender's approval; and the lender's right to acquire the leasehold at a foreclosure sale or by assignment and to reassign it, with the lessor prohibited from unreasonably withholding, conditioning or delaying the reassignment, to sublease, to share in hazard insurance proceeds from damage to the improvements, to share in condemnation proceeds, and to exercise stated rights on the tenant's default or the lease's termination (Small Business Administration 2025).

Table 3. Financeable ground-lease checklist for a leasehold hangar

Source: SBA Standard Operating Procedure 50 10 8, sec. A, ch. 3, para. C.2; Stein (2003).

The magnitude of specific figures, such as the length of the cure period, is negotiable. The presence of each protection is not. A credit officer should treat an absence as a structural defect in the collateral rather than as a point to concede in documentation.

One route to losing the collateral is not on that checklist, because the ground lease does not cause it and no ground-lease protection prevents it. If the borrower files for bankruptcy, the Bankruptcy Code provides that an unexpired lease of nonresidential real property is deemed rejected, and the trustee must immediately surrender the premises to the lessor, if it is not assumed within 120 days after the order for relief, extendable once by 90 days for cause (11 U.S.C. 365(d)(4)). Assumption after that requires the lessor's written consent.

The consequence for a leasehold mortgagee is that the estate securing its loan can be extinguished by the passage of time in a case the lender did not initiate, without any default under the ground lease and without the sponsor doing anything at all. The right to cure a tenant default does not reach it, because there is no tenant default to cure. What does reach it is the new-lease right in Table 3, which is the provision that lets the mortgagee take a fresh lease for the balance of the term after the old one is gone. That is the protection most often negotiated away and the one this section would keep last.

7. The Small Business Administration Programs

Small Business Administration lending encodes much of this discipline into program rule, which is an advantage where the rules are understood and a trap where they are not. The governing authority is Standard Operating Procedure 50 10, and the operative text moves. Version 8 took effect on 1 June 2025. Version 8.1 was issued on 14 August 2026 and takes effect for loans receiving a loan number on or after 1 October 2026 (Small Business Administration 2026). A file assembled to a superseded version can fail on a provision that has since changed, so the first step in any Small Business Administration hangar file is to confirm which version governs at origination.

One correction is worth making at the outset because it recurs in the lending literature. The Small Business Administration ran an informal, loan-by-loan waiver of the lease-term requirement in late 2023, before the rule was amended. That stopgap was superseded by a procedural notice in December 2023 and then by the current Standard Operating Procedure, which contains no lease-term waiver provision. Waivers should not be described as an available route.

7.1 The lease-term test and how renewal options are counted

The provision that governs a ground-leased hangar applies where the transaction is substantially leasehold. The trigger is reached when $500,000 or 30 percent of loan proceeds, whichever is less, will fund leasehold improvements, or when $500,000 or 30 percent of the proposed collateral, whichever is less, consists of leasehold improvements, fixtures, machinery or equipment attached to leased real estate. Where it is reached, the lender must obtain a copy of the written lease, and an assignment of lease and landlord's waiver should be obtained (Small Business Administration 2025).

The lease-term test itself is stated in two tiers, and the distinction between them is routinely collapsed. In the base case, "for 7(a) loans, the lease term, including renewal options exercisable only by the Borrower, should equal or exceed the term of the loan. For 504 loans, the lease term must equal or exceed the term of the loan." The renewal-options language attaches to the 7(a) sentence. The 504 sentence in the base case is bare. In the second tier, where the lender cannot obtain the assignment of lease or the landlord's waiver, "for both 7(a) and 504 loans, the lease term, including renewal options exercisable only by the Borrower, must equal or exceed the term of the loan," and the lender must document its attempt and the reasons for failure (Small Business Administration 2025).

Three practical consequences follow. First, the 7(a) requirement is a recommendation in the base case and an obligation in the second tier, and the trigger for the second tier is the failure to obtain either the assignment or the waiver, not both. Second, the borrower-only renewal-option gloss is not a general concession available on every 504 deal; it appears in the 504 rule only in the second tier. Whether a 504 borrower may count option periods toward the required term therefore depends on how the assignment and waiver were handled. Third, and common to both, options subject to the airport's consent or discretion do not count. Airport ground leases tend to contain precisely that kind of option, which is why the countable term on a hangar deal is often materially shorter than the lease's nominal outside date.

Table 4. The lease-term test under SOP 50 10 8

Source: SBA Standard Operating Procedure 50 10 8, sec. A, ch. 3, para. C.2.

7.2 The debenture-term arithmetic

The 504 program compounds the term problem through its own maturity schedule. A 504 loan matures in 10, 20 or 25 years based on the remaining useful life of the property financed, with a maximum of 25 years for real estate, and the accompanying third party loan must run at least seven years where the 504 loan is ten years and at least ten years where it is twenty or twenty-five (Code of Federal Regulations 2026b; Small Business Administration 2025).

A 504-financed hangar therefore needs a qualifying remaining lease term of twenty to twenty-five years, and many airport ground leases do not have that much runway left by the time a hangar changes hands. A lease expiring in 2049 leaves roughly twenty-three years as of 2026, short of a twenty-five-year debenture unless a countable extension closes the gap. This is where a transaction that works on cash flow fails on collateral term, and it is a recurring reason a hangar acquisition cannot be financed through the 504 program on the structure the borrower first proposes.

7.3 Occupancy, perfection and appraisal

Three further requirements shape a hangar file, and each is frequently misstated.

Occupancy. For an existing building the borrower must occupy 51 percent of the rentable property and may lease up to 49 percent to third parties. For new construction the borrower must occupy 60 percent, may permanently lease up to 20 percent, and may temporarily lease a further 20 percent with the intention of using some of it within three years and all of it within ten (Code of Federal Regulations 2026a; Small Business Administration 2025). Occupancy therefore rises toward 80 percent rather than 100 percent, and a permanent 20 percent sublease is contemplated by the rule. What the rule does prohibit is a use of proceeds: the borrower may not use loan proceeds to improve or renovate rentable property to be subleased to a third party, and for 504 loans such improvements may not secure the third party loan. A hangar the borrower intends to sublease heavily can fail on either limb.

Perfection. The security instrument on leased land is a leasehold mortgage or leasehold deed of trust on the borrower's leasehold interest, supported by the ground-lease clauses listed in Section 6, an assignment of lease and a landlord's waiver where obtainable. Lien position on real estate is generally evidenced by a title insurance policy, which for a leasehold means a policy insuring the leasehold position; the agency does not mandate leasehold title insurance in terms, so a lender relying on it should require it as a condition rather than assume it (Small Business Administration 2025).

Appraisal. The requirement varies by product and is not uniform. For all Standard 7(a) loans secured by commercial real property, the lender must obtain an appraisal by a state-licensed or certified appraiser, with a state-certified appraiser required where the estimated value exceeds $1,000,000. For 7(a) Small and SBA Express loans an appraisal is required only in close-relationship transactions or where an appraisal is otherwise necessary to evaluate creditworthiness, and an evaluation not performed under the Uniform Standards of Professional Appraisal Practice may suffice; for CAPLines the threshold is $500,000. For 504, an appraisal is required where the estimated value of the project property exceeds $500,000, with a state-certified appraiser above $1,000,000 (Small Business Administration 2025). Two further provisions matter for hangars. Earlier editions of the 7(a) chapters required the lender to exclude the contributory value of rental income and of intangible assets when valuing collateral, which for a hangar meant the analysis rested on the leasehold real estate rather than on sublease income. That exclusion does not appear in the current edition, and 7(a) collateral guidance has moved to an appendix, so a lender should not assume it still applies; the 504 chapter contains no equivalent exclusion and instead requires that where a going-concern value is sought, the appraiser allocate separate values to land, building, equipment and business. And the 504 chapter requires that where the collateral is a special purpose property, the appraiser be experienced in the particular industry. An aircraft hangar on a ground lease is the paradigm case for that requirement.

Read together, the Small Business Administration rules are a codification of the same three defenses a prudent conventional lender would build independently: match amortization to a countable lease term, perfect a financeable leasehold mortgage with the lessor's consent, and appraise the leasehold interest specifically. The traps are in the details, and the details move.

8. The Term Standards Compared, and One That Cannot Be Met

Every institutional lender that finances leasehold collateral states a rule about how far the lease must outrun the loan. The rules are not close to each other, and setting them side by side is the fastest way to see what a hangar lender is actually deciding.

Source: Small Business Administration (2025); Fannie Mae (2026); Freddie Mac (2026); Office of the Comptroller of the Currency (2022, 127); Stein (2024).

The two OCC rows are the ones a bank credit officer will care about most, because they come from the examination handbook their supervisor uses. The passage is worth quoting in full, since it states this paper's central thesis in the regulator's own words before it states the standard: "At the end of the ground-lease term, the leasehold improvements revert to the lessor. For this reason, the value of a collateral leasehold interest diminishes over time and has no value upon maturity of the lease. In recognition of this, when the loan does not fully amortize before loan maturity, the expiration of the ground lease should extend sufficiently beyond the amortization period, customarily 20 years, to support refinancing and to help ensure that adequate borrower equity in the project is retained. If the loan does fully amortize during the loan term, a lease term extending 10 years beyond the loan maturity is usually considered sufficient. In calculating debt-service coverage, the ground rent should be deducted as an expense" (Office of the Comptroller of the Currency 2022, 127). The same language appears in the 2013 edition, so it has been the supervisory position for over a decade.

One aviation-specific data point belongs beside the table, and it cuts against all of it. The airport leasing digest reports that "[s]ome Lenders state a preference that the debt on an airport ground lease should be retired at least five years before the end of a lease," and adds that "none of the airport leases reviewed for this digest contained such a provision" (National Academies of Sciences, Engineering, and Medicine 2024, 10). Every standard in the table is a lender's rule about its own loan. None of them appears in the leases themselves.

Two features of that table deserve comment before the arithmetic.

The first is the ordering. The agency program most often used to finance an owner-occupied hangar imposes the weakest term standard in the table, requiring no tail at all. A coterminous rule protects the lender only if the loan amortizes fully, because at the moment of the final payment the collateral has no remaining life. It does nothing for a lender facing a balloon, and it leaves no margin for the time a foreclosure takes.

The second is what the SBA requires of the lease itself. Its ground-lease clause list is real and specific, requiring the tenant's right to encumber the leasehold, no modification or cancellation without the lender's approval, and the lender's rights to acquire the leasehold at foreclosure and reassign it, to sublease, to share in hazard insurance and condemnation proceeds, and rights "upon default of the tenant or termination" (Small Business Administration 2025, sec. A, ch. 3, para. C.2, at 54 to 55). But it specifies no notice period, requires no independent notice of tenant default to the mortgagee, and requires no new-lease right on termination, which is the protection that matters when a lease is terminated rather than assigned. The words "non-disturbance," "estoppel" and "access agreement" do not appear in the standard operating procedure at all.

8.1 An impossibility on federally obligated land

Combine the strictest of those standards with the federal guidance on lease term and the result is that one commonly cited benchmark cannot be met at an obligated airport.

The agency instructs its field offices that they "should not consent to proposed lease terms that exceed 50 years," on the reasoning that a longer term "may be considered a disposal of the property because it likely exceeds the useful life of the structures erected on the property" (Federal Aviation Administration 2026a, para. 12.3.b(3)). Fifty years is therefore the practical ceiling on the initial term of a hangar ground lease on federally obligated land.

A lender applying the unsubordinated multifamily standard needs thirty years of lease behind loan maturity. On a fifty year lease that leaves twenty years for the loan, and only if the loan closes on the day the lease commences. A twenty-five year loan, which is the maximum maturity the SBA allows for improvements on a leasehold interest in land, would require fifty-five years of term. On federally obligated land that lease does not exist.

Three consequences follow. A hangar leasehold will not satisfy the unsubordinated standard on a long loan, so either the ground lease is subordinated, which airport sponsors rarely agree to, or the lender accepts a shorter tail than its own multifamily desk would. Every year that passes after lease commencement tightens the arithmetic, so a loan against a lease already ten years into its term is working with forty years of ceiling, not fifty. And the federal guidance is itself premised on a no-tail model: the stated purpose of a thirty to thirty-five year term is that it is "sufficient to retire a tenant's initial financing," which assumes a loan that fully amortizes inside the lease and leaves nothing behind it.

One belief that circulates in this market needs correcting, and then the correction itself needs a limit put on it. A sponsor needs no federal approval to grant a lease. The compliance manual states that "[t]he FAA does not review all leases, and there is no requirement for an airport sponsor to obtain FAA approval before entering into a lease" (Federal Aviation Administration 2026a, para. 12.3.a). A mortgage of the tenant's own leasehold is not a disposition by the sponsor, so it does not by itself require federal approval either.

The limit is that the structure a lender most wants does require it. Where the sponsor subordinates its interest in a tenant lease in order to facilitate the tenant's financing, the compliance manual requires FAA approval, and the agency's concurrence in any lien, mortgage or other encumbrance on federally obligated property rests on a documented determination together with a sponsor declaration that its grant obligations survive foreclosure or bankruptcy (ibid., para. 6.6.b). The order adds that where the FAA determines an encumbrance may deprive a sponsor of its ability to meet its federal obligations, the Secretary may withhold approval of the sponsor's grant applications (para. 6.6.b(2)).

So the accurate statement is narrower than either of the two beliefs in circulation. A lender waiting for federal consent to the lease itself is waiting for something that does not exist. A lender asking for subordination of the fee on federally obligated land is asking for something that does require federal approval, and that has a documented path for obtaining it. Knowing which of the two is being sought is worth an early conversation with the sponsor.

9. Bank Regulatory Treatment

A regulated lender's own supervisor supplies limits that bear directly on hangar collateral, and they are less specific than the exposure warrants.

The interagency real estate lending guidelines set supervisory loan-to-value limits by category: 65 percent for raw land, 75 percent for land development, 80 percent for commercial and other nonresidential construction, and 85 percent for improved property (Office of the Comptroller of the Currency 2026, app. A). A completed hangar is improved property at 85 percent; a hangar under construction is nonresidential construction at 80 percent. Nothing in the guidelines distinguishes a leasehold from a fee, and nothing distinguishes a special purpose building from a warehouse.

The guidelines do, however, contain the hook a prudent lender needs: "[f]or any subcategory of loans that exhibits greater credit risk than the overall category, a lender should consider the establishment of an internal loan-to-value limit for that subcategory that is lower than the limit for the overall category." That sentence is permissive rather than mandatory, and it is the only place in the supervisory framework where a hangar-specific sublimit finds support.

Loans above the supervisory limits are permitted but tracked: they "should be identified in the institution's records, and their aggregate amount reported at least quarterly to the institution's board of directors," the aggregate of all such loans "should not exceed 100 percent of total capital," and within that, loans on commercial and other non-residential property "should not exceed 30 percent of total capital." A guaranteed loan escapes the cap to the extent of the guaranty, which is one of the practical reasons an SBA-guaranteed hangar loan behaves differently on a bank's balance sheet from a conventional one.

Two further provisions matter to hangar credit. The appraisal threshold for commercial real estate transactions is $500,000, below which an evaluation consistent with safe and sound banking practice is required instead of an appraisal (Real Estate Appraisals, 83 Fed. Reg. 15019 (Apr. 9, 2018)). And a construction facility that primarily finances acquisition, development or construction, has the purpose of turning the property into income-producing real property, and depends on future income, sale or refinancing for repayment is a high volatility commercial real estate exposure carrying a 150 percent risk weight, unless it meets the exclusion conditions, which include a loan-to-value ratio within the supervisory limit and borrower-contributed capital of at least 15 percent of the property's appraised as-completed value (12 C.F.R. 3.2, 3.32(j), as amended at 84 Fed. Reg. 68019 (Dec. 13, 2019)).

The last of those interacts awkwardly with the valuation problem this paper describes. The contributed-capital test is measured against an appraised as-completed value. Where that value is developed on a leasehold with a defined expiration, it is materially lower than the same building would support in fee (Carter 2026b), so a borrower's dollar contribution clears a lower bar in absolute terms while the lender's exposure to a wasting asset is unchanged.

10. What Is Known About Recovery, and What Is Not

The question a credit committee asks last is the one the literature answers least well: if this loan defaults, what comes back.

The benchmark study of realized losses on commercial loans at failed banks examines more than 50,000 defaulted loans originated by banks that failed between November 2008 and December 2013. For the category it labels other commercial real estate, it reports weighted mean loss given default of 38.5 percent, mean loss given default of 43.8 percent and median of 41.1 percent, with a standard deviation of 39.5 percent (Shibut and Singer 2015, tbl. 2; see also Johnston Ross and Shibut 2021). The dispersion is as informative as the central tendency: a standard deviation approaching 40 percent on a mean of 44 percent says that the average is a weak guide to any individual credit.

Securitized experience points the same way. A study of 108,096 conduit loans with an aggregate securitized balance above $1.4 trillion, covering 1995 through the first quarter of 2025, reports a cumulative default rate of 16.9 percent, a cumulative loss rate of 4.4 percent, average loss severity of 49.7 percent on resolved loans with losses above 2 percent, and an average resolution time of 23.8 months (KBRA 2025). Resolution time is the figure a hangar lender should read twice, because a leasehold that loses two further years of term during a workout is worth measurably less at the end of it than at the beginning.

What none of this evidence does is separate leasehold collateral from fee collateral. The failed-bank study uses the word leasehold once, in passing speculation about second liens, and contains no ground-lease variable. The conduit study reports by property type, loan term and vintage, and the property types named in its published summary do not include aviation or a special purpose category, though the summary refers to further unlisted types, so the most that can be said from the public record is that no aviation figure is reported. So the honest statement of the position is that the published loss literature does not measure what a hangar lender is exposed to, and a lender applying a general commercial real estate loss assumption to hangar leasehold collateral is applying a number derived from a population that excludes it.

The author has addressed that gap separately, in work that is a self-deposited preprint rather than a peer-reviewed publication and should be weighed as such: on the bias generalist valuation introduces into hangar loan portfolios (Carter 2026e), on the interaction of environmental contamination with lender security (Carter 2026f), and on recovery rates observed in county records on leasehold-secured aviation assets (Carter 2026g).

11. The Federal Overlay

One layer sits above even a well-drafted ground lease. A federally obligated airport has given written assurances to the Federal Aviation Administration as a condition of accepting grant funds, and those assurances constrain what the sponsor may do with airport property.

Two instruments bear on this, and the paper has previously leaned on the weaker of them. Grant Assurance 5(b) binds the sponsor's disposition of the sponsor's own title or interests. A tenant's mortgage of its own leasehold estate is not within its terms, so reading it as reaching leasehold financing is an inference rather than a reading. The provision that addresses the question directly is paragraph 6.6.b of the compliance manual, which governs liens, mortgages and other encumbrances on federally obligated property, requires FAA approval where the sponsor subordinates to facilitate tenant financing, and requires the sponsor to acknowledge that its grant obligations survive foreclosure or bankruptcy. A lender's leasehold mortgage sits inside that framework, not inside Assurance 5(b).

Assurance 5 is still worth setting out, because it is the reason paragraph 6.6.b exists and it explains what the sponsor is protecting when it declines to subordinate.

Grant Assurance 5, "Preserving Rights and Powers," provides the background. The sponsor undertakes that it "will not take or permit any action which would operate to deprive it of any of the rights and powers necessary to perform any or all of the terms, conditions, and assurances in this Grant Agreement without the written approval of the Secretary," and, at subsection (b), that it "will not sell, lease, encumber, or otherwise transfer or dispose of any part of its title or other interests in the property shown on Exhibit A ... without approval by the Secretary" (Federal Aviation Administration 2025). A leasehold mortgage over improvements on airport land is an encumbrance of an interest in that property, so it sits inside the assurance rather than outside it. The leasehold a lender takes as collateral is junior to a federal overlay the lender cannot alter.

The duration of that overlay is not a single date a lender can plan around. The assurances run "throughout the useful life of the facilities developed or equipment acquired," capped at twenty years from acceptance of the grant for development and equipment projects, with no limit at all on the assurances regarding exclusive rights and airport revenue so long as the property is used as an airport, and no limit on the assurances with respect to real property acquired with federal funds (Federal Aviation Administration 2025). For the land under a hangar, the obligation is frequently perpetual.

Lease duration is where the overlay bears on collateral term. The Airport Compliance Manual instructs that leases exceeding fifty years "may be considered a disposal of the property because it likely exceeds the useful life of the structures erected on the property," that all disposals of federally acquired or conveyed property require headquarters concurrence, and that a region or airports district office "should not consent to proposed lease terms that exceed 50 years" (Federal Aviation Administration 2026a). This is not a statutory cap on the sponsor; it is an internal instruction to Federal Aviation Administration field offices together with a warning that a long lease may be recharacterized as a disposal. The practical effect for a lender is the same, though: a sponsor cannot solve a term-mismatch problem by granting a ninety-nine-year lease, and the agency's own amortization benchmark of thirty to thirty-five years is the realistic ceiling on the runway a hangar loan can be underwritten against.

Consent to transfer is the sharper point. The Federal Aviation Administration's posture toward assignment is restrictive: its minimum standards guidance advises that a sponsor "is under no obligation to accept a proposed assignment or sale of the access agreement by one party to another" and encourages sponsors to prohibit sale or assignment expressly (Federal Aviation Administration 2023). That language sits in the advisory circular's discussion of through-the-fence access agreements rather than on-airport ground leases, so it does not govern a hangar built on leased airport land directly. It indicates the agency's general posture toward assignment rather than controlling an on-airport leasehold. What controls an on-airport leasehold is Grant Assurance 5(b) together with the sponsor's own lease review obligations under the compliance manual, and the conclusion is the same in either case: a lender cannot assume it will be able to foreclose and transfer a hangar leasehold to a new operator without the sponsor's cooperation.

The defense is to obtain that cooperation before closing rather than hope for it during a workout. What a lender wants is a consent and estoppel from the airport sponsor that recognizes the leasehold mortgage, agrees to notice and cure and to a new lease on foreclosure, confirms no existing default, and confirms that the sponsor will not unreasonably withhold consent to an assignment to the lender or its designee. Absent that agreement, the federal overlay can strand the collateral in the lender's hands after a clean foreclosure. The legal terrain is surveyed in the Airport Cooperative Research Program's treatment of general aviation lease development (Transportation Research Board 2024), and the structures and rate mechanics in its earlier guidebook on leasing airport property (Transportation Research Board 2011).

12. Underwriting Conditions

The analysis converts into a set of conditions a credit officer can attach to a leasehold hangar approval. None is exotic. The value is in applying them before closing rather than discovering their absence in a workout.

First, size amortization to the countable remaining lease term rather than to the hangar's physical life, and add a cushion so the loan retires before reversion and before any renewal negotiation. Count renewal options only where the borrower may exercise them unilaterally.

Second, order a leasehold appraisal, and confirm on review that the interest appraised is the leasehold, that the remaining term and ground rent are stated, and that comparables were adjusted for property rights rather than taken from fee-simple sales.

Third, read the reversion clause and treat terminal collateral value as zero absent a contractual salvage or compensation right. Note whether early termination for tenant default also vests the improvements in the airport.

Fourth, condition the loan on a financeable ground lease containing the protections in Table 3: the right to encumber, no modification or cancellation without the mortgagee's approval, separate notice of default and a cure period, acquisition and reassignment rights with consent not unreasonably withheld, a new lease on termination for the balance of the original term, the right to sublease, and rights to insurance and condemnation proceeds.

Fifth, obtain a leasehold mortgagee consent and estoppel from the ground lessor and, where distinct, the airport sponsor, addressing notice and cure, a new lease on foreclosure, and consent to assignment to the lender or its designee.

Sixth, on Small Business Administration files, confirm the version of Standard Operating Procedure 50 10 in force at origination, run the option-counting and debenture-term arithmetic explicitly, check occupancy against the 51 and 60 percent thresholds and the use-of-proceeds prohibition on improving space to be subleased, and perfect the leasehold mortgage with the lessor's written consent and an assignment of lease.

Seventh, monitor lease compliance over the life of the loan: ground rent payment, insurance, rate-adjustment dates, and any renewal-option exercise deadline, since a borrower's missed option shortens the countable term after closing.

13. Limitations

The comparison in Section 8 is a comparison of published standards, not of practice. What a lender writes in a seller guide and what its credit committee approves on a particular asset can differ, and no survey of actual hangar loan terms exists to test the gap.

The loss evidence in Section 10 is drawn from populations that do not contain the subject. The failed-bank study covers loans at banks that failed in a specific and severe window, which biases loss given default upward relative to a normal cycle, while the conduit study covers securitized loans that were underwritten to standards a small hangar credit would not meet. Neither carries a leasehold variable. The figures establish the order of magnitude of commercial real estate loss and the dispersion around it; they do not establish a hangar loss rate.

The federal position in Section 8.1 rests on guidance directed at agency field offices rather than on a regulation binding sponsors. A sponsor may in principle grant a longer term, and the consequence is a disposal analysis rather than a prohibition. The practical effect of that guidance on observed lease terms has not been measured.

The three preprints cited at the end of Section 10 are the author's own and have not been peer reviewed. They are cited as work addressing an acknowledged gap, not as settled evidence, and a reader weighing their conclusions should read them rather than rely on this summary.

Finally, this paper describes the United States. Leasehold financing conventions, foreclosure procedure and airport ownership differ elsewhere, and none of the standards discussed here transfers.

14. Conclusion

A hangar loan is not an ordinary real estate loan with an unusual property type. It is a loan against a contract right with an expiration date, and every underwriting decision that assumes otherwise errs in the same direction. The measurable part of that error is the term mismatch set out in Section 3, where a five-year overrun on a twenty-five-year schedule strands 37 percent of the original balance at the moment the collateral reverts. The unmeasurable part is worse: a ground lease without leasehold mortgagee protections converts a performing loan into an unsecured one the first time the borrower misses a ground rent payment, and no advance rate compensates for that.

The defenses are available and inexpensive relative to the exposure. They require an appraisal of the interest pledged rather than the building, a lease read for what it says about the mortgagee rather than the tenant, a consent obtained from the airport sponsor before it is needed, and an amortization schedule sized to a term the lender can actually count. The Small Business Administration has written most of that into rule, which makes its lending manual a useful checklist for conventional lenders as well, provided the reader takes the provisions as they are drafted rather than as they are commonly summarized.

The single input that resolves most of the remaining uncertainty is a competent appraisal of the leasehold interest, prepared by someone who values the reversion, the ground rent burden and the remaining term rather than the physical hangar. A credit officer who insists on that appraisal is not adding cost. They are pricing the collateral they actually hold.

References

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This paper is research and general information for professionals evaluating aviation real estate. It is not appraisal, legal, tax, or credit advice, and it does not create an engagement. Program rules and agency guidance are stated as of September 2026; Standard Operating Procedure 50 10 is amended frequently, and the version in force at origination governs.