Ground Lease

Ground leases are a specialized structure most common in urban markets where land is extremely valuable and landowners want to retain ownership while generating income. Ground lease terms are typically very long -- 50 to 99 years -- to provide the tenant enough time to justify the capital investment of constructing and amortizing a building. Major retailers, restaurant chains, and institutional investors frequently participate in ground lease transactions.

From the landowner's perspective, a ground lease provides a steady income stream while preserving long-term land ownership and the ability to benefit from land appreciation upon lease expiration. The lease typically includes rent escalations tied to CPI, fixed percentage increases, or periodic fair market value resets. Because the land retains its value indefinitely, ground leases are considered one of the safest positions in real estate and are popular among endowments, pension funds, and family trusts.

For the tenant (or leasehold interest holder), the ground lease eliminates the need to purchase land, reducing the upfront capital requirement. However, financing a leasehold interest can be more complex because lenders face the risk that the ground lease could be terminated. Lenders typically require recognition agreements (also called SNDAs) from the ground lessor to protect their interests. As the remaining lease term shortens, the leasehold position becomes less valuable and harder to finance, which is an important consideration when evaluating ground lease investments.