Ground Leases: How They Work and Who Uses Them

Conor Meyers — Co-Founder & Business AttorneyHas built and run businesses; advises owners on contracts, transactions, and risk. About Conor →

You own the building. Somebody else owns the ground it stands on, and eventually gets the building too.

Ground leases separate land from improvements. The landowner keeps the land and receives rent; the tenant builds, finances, operates, and owns the structure for the lease term. It is common where landowners will not sell — family holdings, institutional owners, municipalities. Ground lease vs fee simple purchase is a genuine strategic choice rather than a fallback, but the economics differ fundamentally.

We handle these matters for growth-stage companies in Idaho and California. This is general information — not legal or tax advice on a specific situation.

A ground lease that cannot be financed is a ground lease nobody wants.

How ground leases work

The tenant leases raw or improved land for a long term, constructs improvements at its own cost, and operates them. Rent is paid on the land. The tenant depreciates the improvements it owns and controls the building during the term.

At expiration the improvements typically revert to the landowner, though some leases provide for removal or for a purchase option. That reversion is the defining economic feature and it shapes everything about how the deal is valued.

The reversion is not a detail. It is the economics.

Ground lease term length

Ground lease term length is driven by financing and depreciation. Terms of fifty to ninety-nine years are common, because a tenant funding a building needs a term long enough to amortize the investment and satisfy a lender.

A term too short relative to the building’s useful life makes the leasehold difficult to finance and difficult to sell. Extension options can help but lenders generally look at the committed term rather than at options that may not be exercised.

Lenders count committed years, not optional ones.

Financing a ground lease improvement

Financing a ground lease improvement requires provisions a lender will accept: the right to mortgage the leasehold, notice to the lender of any tenant default, a reasonable opportunity for the lender to cure, and the right to a new lease on the same terms if the original is terminated.

Without those protections a lender’s security can be extinguished by a default it never knew about. The FDIC’s lender resources reflect why leasehold mortgage provisions receive close scrutiny in credit review.

Lender cure rights are what make a leasehold mortgageable.

Rent escalation and reset

Negotiating ground lease rent escalation is where long-term value is decided. Fixed periodic increases are predictable. Index-linked increases track inflation. Periodic fair market revaluation is the most contentious, because a reset decades out can be enormous and is determined by an appraisal process nobody can predict.

Where revaluation applies, the appraisal methodology should be specified — particularly whether the land is valued as vacant or as improved, which produces very different numbers. Tenants should also seek a cap on any single reset.

Whether land is valued vacant or improved changes everything.

Reversion and the end of term

Ground lease reversion means the landowner receives the improvements, usually without payment. As expiration approaches, a tenant’s incentive to invest in the building declines sharply, and leases often address this with maintenance obligations and reserve requirements.

Options to purchase the land, rights of first refusal, and extension rights all mitigate the reversion, and each is worth more negotiated at the outset than sought later. Tax treatment of improvements and rent follows IRS rules, and recorded leasehold interests in Idaho are governed by Title 55.

Investment incentive collapses as expiration approaches. Draft for it.

What to check before signing

Confirm the landowner actually holds clear title and has authority to grant a lease of that length, since a ground lease outlives most other arrangements affecting the parcel. Check for existing mortgages on the fee, because an unsubordinated prior lien can extinguish the leasehold on foreclosure unless the lender agrees otherwise in a recorded non-disturbance agreement.

Then read the use, assignment, and alteration provisions against a fifty-year horizon rather than against current plans. A restriction that seems reasonable today can prevent a change of use, a refinancing, or a sale of the leasehold two decades from now, when the people who negotiated it are no longer involved and the document is all that remains.

Read the restrictions against fifty years, not against this year.

A simple plan to get a legal partner in your corner

Owners who bring in commercial lease negotiation counsel early almost always pay less than those who call one afterward.

The engagement at a glance

A three-step path from first call to ongoing protection.

Frequently asked questions