Definition
A ground lease is a long-term lease agreement in which a tenant leases land from a landowner and typically constructs, owns, and operates improvements (such as buildings) on the land for the lease term.
Key Characteristics
- Long lease terms (often 30–99 years)
- Tenant owns improvements during lease term
- Land ownership remains with the lessor
- Improvements often revert to landowner at lease expiration
Structure
Ground leases usually include:
- Base ground rent
- Periodic rent escalations (fixed, CPI-based, or percentage-based)
- Maintenance and operating obligations (typically borne by tenant)
- Reversion clause at expiration
Types of Ground Leases
- Subordinated Ground Lease: Landowner agrees to subordinate interest to construction financing.
- Unsubordinated Ground Lease: Landowner maintains senior position; lower risk to landowner.
Example
A developer leases land for 75 years at $500,000 annually and constructs a retail center on the site.
The developer operates the property and collects tenant rents, while paying ground rent to the landowner. At lease expiration, ownership of the improvements may revert to the landowner unless otherwise negotiated.
Investor Considerations
- Ground rent payment priority in capital stack
- Impact on loan underwriting and DSCR
- Remaining lease term at acquisition
- Reversion risk and renewal options
Advantages
- Lower upfront land acquisition cost
- Potential capital efficiency for developers
- Predictable income stream for landowner
Risks
- Escalating ground rent burden
- Reduced valuation compared to fee-simple ownership
- Financing complexity
- Lease expiration risk
Investor Perspective
Ground-leased assets often trade at different cap rates due to the bifurcation of land and improvements. Investors must model long-term rent escalations and residual value implications carefully.