A ground lease is a long-term lease in which a tenant rents land, builds or operates improvements on it, and returns the land plus those improvements to the owner at the end of the term. Terms commonly run 50 to 99 years. The tenant owns the building during the term; the landowner keeps title to the land.
How Does a Ground Lease Work?
A ground lease works by separating ownership of the land from ownership of the building on it. The tenant pays ground rent, develops the site, and operates the improvements for a term commonly 50 to 99 years, per National Association of Realtors guidance. Initial ground rent is usually set as a land capitalization rate applied to the land's appraised value, often in the range of 5% to 8%.
Two structures decide whether the tenant can finance the building. In a subordinated ground lease, the landowner agrees to sit behind the tenant's construction lender, so the land itself backs the loan and the tenant borrows more easily, but the owner risks losing the land in a default. In an unsubordinated ground lease, the owner keeps first priority, the lender cannot reach the land, and financing is harder, so owners often charge lower rent in exchange.
Feature | Subordinated ground lease | Unsubordinated ground lease |
Land as loan collateral | Yes, land backs tenant financing | No, lender cannot reach the land |
Landowner risk | Higher, can lose land in default | Lower, keeps first priority |
Typical rent | Higher, to offset risk | Lower, to attract a tenant |
Tenant financing | Easier | Harder |
Rent rarely stays flat. Ground leases carry escalations, often a fixed step such as 2% per year or 10% every five years, or a CPI-linked reset with a cap. At expiration the improvements revert to the landowner unless the lease requires removal, which is the defining economic feature of the structure.
Why a Ground Lease Matters
A ground lease matters because it lets a developer control and build on land without buying it, freeing capital that would otherwise sit in the dirt, while giving the landowner permanent land ownership plus a long income stream. The reversion is the key stake: because the owner recovers the land and the building at term end, a shorter remaining term lowers what the leasehold is worth.
For financing, remaining term is a hard constraint. Lenders commonly require the ground lease to run at least 10 years beyond loan maturity, so a leasehold with a short remaining term can be difficult to finance or sell. The quotable point for an operator: a ground lease trades ownership of the dirt for the use of it, and every year that passes shortens the remaining term that a buyer or lender will underwrite.
Example
A developer ground-leases a corner parcel appraised at $10,000,000 and negotiates a 6.5% land capitalization rate, producing $650,000 in year-one ground rent. The lease carries a 2% fixed annual escalation. The table walks the first five years, rounded to the nearest dollar.
Year | Calculation | Ground rent |
1 | $10,000,000 x 6.5% | $650,000 |
2 | $650,000 x 1.02 | $663,000 |
3 | $663,000 x 1.02 | $676,260 |
4 | $676,260 x 1.02 | $689,785 |
5 | $689,785 x 1.02 | $703,581 |
Over the first five years the developer pays $3,382,626 in ground rent and still owns the building it constructs. At the end of the full term, the building reverts to the landowner. The 6.5% land cap rate is deliberately tighter than a typical building cap rate, because land carries less operating risk than improvements.
Variations and Edge Cases
A ground lease is not a single template: rent setting, reversion terms, and financing rights vary enough to change the deal's economics. The table below covers variants an operator should confirm before underwriting a leasehold.
Variant | Treatment |
Subordinated vs unsubordinated | Subordination lets the land secure tenant debt, raising owner risk and usually rent |
Reversion vs removal | Improvements usually revert to the owner at term end; some leases require the tenant to remove them |
Rent reset method | Fixed steps, CPI with a cap, or periodic fair market value resets each produce different rent paths |
Percentage rent | Some ground leases add rent tied to the project's revenue above a breakpoint |
Remaining term | A short remaining term lowers leasehold value and can block financing |
The common mistake is treating a leasehold like fee ownership. A ground lease grants use, not the land, and the remaining term plus the reversion clause govern what the tenant's interest is worth.
Ground Lease vs Net Lease
A ground lease is often confused with a net lease, and the two describe different things. A ground lease is a lease of land on which the tenant builds and owns the improvements for a long term, commonly 50 to 99 years. A net lease is a lease of an already-built property in which the tenant pays some or all of the taxes, insurance, and maintenance on top of base rent, usually for 10 to 30 years.
The distinction is what changes hands. A ground lease conveys the right to use bare land and build on it, with the building reverting to the owner at term end. A net lease conveys the right to occupy an existing building, with expense responsibility shifted to the tenant but no land development involved.
Frequently Asked Questions
How long is a typical ground lease?A typical ground lease runs 50 to 99 years, far longer than the 10 to 30 years common for net leases. The long term lets a tenant justify the cost of constructing a building it will not own at the end, since the improvements revert to the landowner when the lease expires.
How is ground lease rent calculated?Ground lease rent is usually set by applying a land capitalization rate to the appraised value of the land, often in the range of 5% to 8%. On land appraised at $10,000,000 with a 6.5% land cap rate, year-one rent is $650,000. Most ground leases then escalate that rent through fixed steps or a CPI-linked reset.
What is the difference between a subordinated and unsubordinated ground lease?In a subordinated ground lease, the landowner allows the land to secure the tenant's construction loan, which eases financing but risks the owner losing the land in a default. In an unsubordinated ground lease, the owner keeps first priority, so the lender cannot reach the land and the tenant's financing is harder to arrange.
Related Terms
Rent Escalation Clause
Percentage Rent
Cap Rate
Highest and Best Use
Net Operating Income