A ground lease is one of the more misunderstood structures in commercial real estate. Most CRE leases are agreements to rent a building. A ground lease is an agreement to rent the land underneath a building, often for decades, with the tenant building, owning, and operating whatever sits on top. It's a structure that lets sponsors develop properties without ever owning the dirt, lets landowners earn long-term income without selling, and lets institutional capital deploy into deals that wouldn't otherwise pencil.
Ground leases show up across the spectrum of CRE: hotels on city-owned land, retail pads on shopping center sites, office buildings in dense urban cores where landowners refuse to sell, ground-up multifamily in markets where land trades at a premium, and renewable energy projects sited on agricultural or industrial land. The mechanics differ from a standard purchase, the financing is more complicated, and the underwriting questions are different. But for the right deal, a ground lease is a powerful tool.
This guide walks through what a ground lease is, the two main structures (subordinated vs unsubordinated), how they're typically financed, the pros and cons for both tenants and landowners, and the issues that come up in negotiation. If you're trying to finance a ground-leased property or evaluate one as an investment, Lev can match you with lenders who do this kind of deal.
What is a ground lease?
A ground lease is a long-term lease of land in which the tenant (often called the lessee or ground tenant) has the right to develop and improve the property during the lease term. The tenant typically owns the improvements (the building, parking, landscaping, infrastructure) for the duration of the lease. At lease expiration, the improvements either revert to the landowner ("reversion") or, in some structures, must be removed by the tenant.
Three characteristics distinguish a ground lease from a standard commercial lease:
Long term: ground leases typically run 30 to 99 years, with 50 years being a common midpoint. The reason for the length is that the tenant needs enough time to amortize the cost of the improvements they're building. A $50 million hotel doesn't pencil on a 10-year lease.
Tenant owns the improvements: unlike a standard lease, where the landlord owns the building and the tenant rents it, a ground tenant builds and owns the structure. For accounting and tax purposes, the improvements are typically on the tenant's balance sheet during the lease term, not the landowner's.
Net structure: ground leases are almost always net leases. The tenant pays property taxes, insurance, and all maintenance and capital expenditures. The landowner's only obligation is to deliver and quietly hold the land.
A useful mental model: a ground lease is a structured way to separate the land value from the improvement value. The landowner keeps the land (and the rent stream from it). The tenant builds on the land, operates the improvements, and either renews or walks away when the lease ends.
Subordinated vs unsubordinated ground leases
The single most consequential variable in a ground lease is whether it's subordinated or unsubordinated to a leasehold mortgage on the property. The two structures have very different risk profiles and lender appetites.
Subordinated ground lease
In a subordinated ground lease, the landowner agrees that the ground lease will be subordinate to a mortgage on the leasehold interest. If the tenant takes out a construction or permanent loan and later defaults, the lender can foreclose on the leasehold and, in a worst case, on the land itself. The landowner is effectively standing behind the lender in payment priority.
Why landowners agree to this: because it makes the tenant's project financeable on better terms. Without subordination, very few lenders will write a leasehold mortgage at institutional pricing.
What landowners get in return: typically a higher ground rent, sometimes a participation in the project economics, and often a fee for granting subordination upfront.
Why tenants want this: it dramatically expands the pool of lenders who will finance the project, lowers the cost of debt, and increases the loan amount (and therefore the leverage on equity).
Subordinated ground leases are common when the landowner is a private party with a strong need for current income and is willing to take on the risk of losing the land in a worst case.
Unsubordinated ground lease
In an unsubordinated ground lease, the landowner does not subordinate. If the tenant defaults on the leasehold mortgage, the lender's recourse is limited to the leasehold interest itself; the land remains the landowner's, free of any encumbrance from the leasehold mortgage.
Why landowners prefer this: it protects the land. The worst case is that the tenant defaults, the lender forecloses on the leasehold, and the new owner of the leasehold becomes the new tenant under the same ground lease. The landowner never loses the land.
What it means for financing: leasehold mortgages on unsubordinated ground leases are still possible, but the lender's collateral is weaker (just the leasehold, not a path to the fee). Pricing is typically higher, leverage is typically lower, and the pool of lenders is narrower.
When unsubordinated structures work: when the lender accepts the leasehold-only collateral, when the lease term is long enough that the leasehold has real residual value, and when the rent is structured so the leasehold cash flow comfortably covers debt service.
Unsubordinated ground leases are now the more common structure, especially for institutional landowners (universities, churches, government entities) who can't or won't subordinate.
For a deeper look at how leasehold mortgages and lender protections fit together, see Lev's commercial lien guide.
Rent structures in ground leases
Ground rent comes in several flavors, and the structure significantly affects the long-term economics for both sides.
Flat rent: a fixed annual payment for the entire term. Increasingly rare for long-term leases because the landowner takes inflation risk.
Scheduled increases: rent that steps up on a predetermined schedule, often every 5 or 10 years. The increases may be a fixed percentage (e.g., 10% every 5 years), tied to an index (e.g., CPI with a floor and cap), or a hybrid.
Fair market rent resets: rent is reset to fair market periodically (e.g., every 25 years) based on an independent appraisal. This protects the landowner against long-term inflation but introduces uncertainty for the tenant and complicates leasehold financing.
Percentage rent: rent calculated as a percentage of the tenant's revenue or NOI. More common in retail ground leases on high-traffic sites. Less common in office, industrial, or multifamily.
Hybrid: a base rent plus percentage component, plus periodic resets. Common in larger, more sophisticated deals.
For tenants, the ideal rent structure is predictable enough to underwrite (flat or capped) but with enough flexibility that the deal works in different rate environments. For landowners, the ideal is enough escalator to keep up with inflation and capture upside if the property performs.
Most leasehold lenders heavily prefer predictable rent structures and will charge more or reduce leverage on leases with fair-market resets, because the resets create cash flow uncertainty that's hard to underwrite.
Pros and cons for tenants (ground lessees)
A ground lease can be the right structure or the wrong one depending on the deal. The relevant pros and cons:
Pros
Lower capital requirement: instead of buying the land outright, the tenant pays an annual ground rent. On a deal where land would cost $20 million, a ground lease at $1 million per year might free up the entire $20 million for construction and improvements.
Better deal economics: ground rent is tax-deductible as an operating expense, where land purchase isn't depreciable. For a tenant in a high tax bracket, the after-tax economics of leasing the land can be materially better than buying it.
Access to otherwise-unavailable sites: in markets where landowners refuse to sell (universities, religious institutions, families with multi-generational holdings), a ground lease may be the only way to access the site.
Higher leverage on equity: the smaller initial capital requirement means equity returns can be amplified when the project performs.
Cons
Reversion risk: unless the lease provides otherwise, the improvements revert to the landowner at lease expiration. A building with 5 years of useful life left at lease end is still meaningful value walking away.
Refinancing risk near term-end: leasehold mortgages typically require at least 15 to 20 years of remaining lease term, and ideally 25 to 30+. A leasehold with only 20 years left can be difficult to refinance.
Rent escalations and resets: ground rent typically rises over time, and on fair-market reset deals the increase can be substantial. This compresses NOI growth that the tenant would otherwise enjoy.
Less control: ground leases typically have use restrictions, alteration approval rights for the landowner, and other constraints. Tenants don't have the full freedom they would as a fee owner.
Lender pool is narrower: leasehold mortgages are a specialty product. Not every senior lender will write one, and pricing is typically modestly higher than fee mortgages.
Pros and cons for landowners (ground lessors)
The other side of the deal:
Pros
Long-term income stream: 50 to 99 years of stable, growing rent income with no operating responsibilities. For institutions and family holdings, that's an attractive alternative to a one-time sale.
No capital gains at signing: ground leases are not sales for tax purposes, so the landowner doesn't realize capital gains on the land value at lease signing. The rent is taxed as ordinary income as received.
Retention of the asset: the land remains the landowner's, with all the optionality that implies. At lease end, the landowner controls the improvements as well.
Inflation protection: rent escalators (or fair-market resets) keep the income stream growing with inflation, unlike a fixed sale price that's locked at signing.
Cons
Foregone capital: a sale would generate proceeds the landowner could deploy elsewhere. A ground lease preserves the asset but ties up the value for the lease term.
Subordination risk: in subordinated deals, the landowner is exposed to losing the land if the tenant defaults and the leasehold lender forecloses.
Negotiation complexity: ground leases are some of the most heavily negotiated documents in CRE. The legal cost of structuring one is significantly higher than a standard land sale.
Reduced flexibility: the land is locked into the use and structure agreed in the lease. If the market for that use weakens during the lease term, the landowner has little ability to change course.
How leasehold mortgages work
A leasehold mortgage is a mortgage on the tenant's leasehold interest in the property, not on the land itself. From the lender's perspective, the collateral is the right to occupy and use the land under the ground lease, plus the improvements the tenant has built (which the tenant owns during the lease term).
Key issues lenders focus on when writing a leasehold mortgage:
Remaining lease term: lenders generally want the lease to run at least 15 to 20 years beyond the maturity of the loan. A 30-year loan on a leasehold with 35 years remaining is workable; a 30-year loan on a leasehold with 25 years remaining typically isn't.
Subordination: subordinated leases are easier to finance and get tighter pricing. Unsubordinated leases can be financed but typically at lower leverage and higher cost.
Notice and cure rights: the leasehold mortgage will require the landowner to give the lender notice of any tenant default and a reasonable period for the lender to cure the default (often 30 to 60 days for monetary defaults and longer for non-monetary defaults).
New lease rights: in case the tenant defaults and the lease is terminated, the lender typically wants the right to enter into a new ground lease directly with the landowner on the same terms. This protects the lender's investment even if the original tenant is gone.
Mortgageable interests: the lease has to expressly permit a leasehold mortgage. Some older or institutional ground leases prohibit mortgages or require the landowner's consent, which complicates financing.
Subordination of the fee: even in subordinated deals, the specific terms of the fee subordination matter. Standard institutional language ensures the lender can foreclose on the fee in default, but the mechanics need to be in the lease.
Many of these issues get negotiated in a "leasehold mortgagee protection clause" that's baked into the ground lease at signing. If you're a ground tenant who anticipates ever financing the property, this clause is one of the most important provisions in the document.
Common pitfalls in ground lease deals
Some recurring mistakes from both tenants and landowners:
Tenant signs a lease without leasehold mortgagee protection language: years later, the tenant tries to finance an improvement project and finds no lender will touch it. Negotiate financeability provisions at signing, not in a side letter after construction.
Landowner doesn't get a fair-market reset right: a 99-year lease with only fixed 10% bumps every 10 years can fall meaningfully behind market over decades. Negotiate at least one fair-market reset in long-term leases.
Reversion isn't planned for: the lease is silent on what happens to improvements at expiration. Lawyers should specify whether improvements revert to the landowner, are removed by the tenant, or are dealt with on some other basis.
Insurance and casualty provisions are weak: in the event of fire or other casualty, what happens? Does the tenant rebuild? Does the lease terminate? Who bears the cost? Get this nailed down at signing.
Use restrictions are too tight: a use restriction that made sense at lease signing in 2005 may be obsolete in 2045. Consider whether the use clause should permit a broader range of uses (within reason) to preserve flexibility for both sides.
Failure to coordinate with title insurance: leasehold title insurance is its own product. Tenants and lenders should obtain leasehold-specific title coverage, not just standard owner's policies.
When does a ground lease make sense?
Ground leases work in specific situations:
The landowner won't or can't sell: institutional landowners (universities, hospitals, government, religious organizations) often face mandates that prohibit selling land. A ground lease is the only path to monetize the property.
The land value is a large share of total project cost: in dense urban markets where land is 40 to 60% of the total project cost, taking the land out of the purchase price unlocks meaningfully better return economics for the developer.
The tenant needs the location: certain locations (a corner lot in a prime retail district, an infill site near a transit hub) are valuable precisely because they can't be replicated. A ground lease may be the only path to that location.
Tax planning: certain tenant tax profiles favor lease payments over land purchases. Discuss with a tax advisor before assuming this applies.
Public-private partnerships: city and state governments often ground-lease publicly owned land to private developers as part of redevelopment programs. The ground lease structure preserves public ownership while permitting private investment.
When a ground lease doesn't work: when the deal needs maximum financing flexibility, when the lease term is too short to amortize the improvements, when the rent escalators are too steep, or when the landowner won't agree to financeability provisions.
Frequently asked questions
How long is a typical ground lease?
Most institutional ground leases are 50 to 99 years. Shorter leases (20 to 40 years) appear in specific contexts but are less common for ground-up development. The lease term has to be long enough for the tenant to amortize the improvements and for the leasehold to be financeable.
Who owns the building during the lease?
The tenant owns the improvements during the lease term. At lease expiration, the improvements typically revert to the landowner ("reversion"), though the specific treatment is negotiated in the lease.
Can a ground lease be financed with a mortgage?
Yes, through a leasehold mortgage. The collateral is the tenant's leasehold interest plus the improvements, not the underlying land. Subordinated ground leases (where the landowner subordinates to the leasehold mortgage) are easier to finance at institutional pricing. Unsubordinated ground leases can be financed but typically at lower leverage and higher rates.
What's a leasehold mortgagee protection clause?
A provision in the ground lease that protects the leasehold lender's rights. Typical components: notice of tenant default and cure rights for the lender, the lender's right to enter into a new lease directly with the landowner if the original lease is terminated, restrictions on the landowner's ability to amend the lease without lender consent, and other standard institutional protections.
What happens at the end of a ground lease?
It depends on the lease. Common structures: improvements revert to the landowner at no cost (most common); tenant has option to purchase the land at a predetermined price or fair market value; lease automatically renews for additional terms; or improvements must be removed by the tenant.
Can a ground lease be assigned or sold?
Usually yes, subject to the landowner's consent rights. Most ground leases permit assignment of the leasehold interest, often with consent that may not be unreasonably withheld. Sophisticated leases include specific criteria for what constitutes a permitted assignment without consent.
What's the difference between a ground lease and a leasehold estate?
A leasehold estate is the general legal concept of a tenant's right to occupy property for a term of years. A ground lease is a specific type of leasehold estate where the tenant rents land and builds on it. All ground leases create leasehold estates, but not all leasehold estates are ground leases. For more, see Lev's leasehold estate guide.
How is ground rent typically structured?
Common structures: flat rent (rare for long leases), scheduled percentage increases every 5 or 10 years, CPI-based escalations with floors and caps, periodic fair-market resets (typically every 25 to 30 years), percentage rent on retail deals, or hybrid structures. The structure has major implications for both parties' long-term economics.
Is a ground lease the same as a sale-leaseback?
No. A sale-leaseback involves selling the entire property (land plus improvements) and leasing the whole thing back. A ground lease only involves the land; the tenant builds and owns the improvements separately. The two are related concepts but distinct structures.
What's a ground lease worth from the landowner's perspective?
The value of the ground lessor's interest is the present value of the future rent stream plus the discounted value of the reversion at lease end. Institutional buyers of ground rents (often called "fee position" or "ground rent" investors) price these as long-duration, inflation-linked income streams, similar to a long-dated municipal bond.
The takeaway
Ground leases are a specialty structure that solves specific problems: institutional landowners who can't sell, dense markets where land cost dominates the project, and tenants seeking tax and capital efficiency. They aren't right for every deal, and the financeability of the leasehold depends heavily on terms negotiated at signing.
For tenants, the most consequential question at signing is whether the lease is financeable, and at what leverage. For landowners, the most consequential question is whether the rent structure will keep pace with inflation over a 50 to 99 year term.
If you're trying to finance a ground-leased property, start with Lev to get matched with leasehold lenders who write this kind of deal. Most senior lenders don't, so the right matchmaking up front makes a real difference.
