Ground Lease
A ground lease is a long-term lease agreement in which a landowner (lessor) leases the underlying land to a tenant (lessee) who retains the right to develop, improve, and use the property during the lease term, with the land — and typically the improvements — reverting to the landowner at the lease's expiration.
Ground leases separate the ownership of land from the ownership of improvements, creating a layered property interest structure that has significant implications for valuation, financing, and investment strategy. The landowner — the fee owner of the land — retains the freehold interest while receiving a predictable income stream from ground rent. The tenant — the ground lessee — obtains long-term use rights sufficient to justify constructing or owning buildings on the leased land.
Ground leases in the United States typically run for very long terms: 50 to 99 years are common, with some structures extending to 999 years for perpetual equivalency. The long term is necessary to provide the lessee with sufficient economic life to amortize development costs and to make the leasehold interest attractive to construction lenders, who require a lease term meaningfully longer than the loan term to secure their collateral interest.
Ground rent structures vary. Fixed-rent leases provide payment certainty but erode in real terms over time as inflation reduces the purchasing power of nominal rent. Step-up leases provide periodic rent increases at fixed percentages or amounts tied to indices such as the Consumer Price Index. Reappraisal-based leases reset the rent to a percentage of the then-current land value at defined intervals — typically every 10 to 25 years — ensuring that the landowner captures appreciation in land value. From an investor's perspective, reappraisal provisions create income uncertainty for the lessee and can produce sharp rent increases when land values have appreciated significantly.
Ground leases are common in situations where landowners are unwilling or unable to sell — institutional landowners such as universities, hospitals, churches, and Native American tribes frequently employ ground leases — or when the separation of land and building ownership serves estate planning or tax objectives. In major U.S. commercial markets including Manhattan, Chicago, and Honolulu, ground leases are a standard mechanism for institutional landowners to participate in development economics while retaining permanent land ownership.
For real estate investors, leasehold properties — those where the investor owns the building on leased land — typically trade at a discount to fee simple properties because the expiring lease term reduces the remaining useful economic life, reappraisal risk can increase occupancy costs, and financing terms for leasehold interests are generally less favorable than for fee simple ownership.