Ground Lease

What is a ground lease?

A ground lease is a type of long-term lease agreement that allows a tenant to build—and temporarily own—improvements on the leased land. Ground leases are common in commercial real estate and can generally last up to 20-99 years. During the lease term, the tenant typically builds property for business use. At the end of the term, they’ll transfer ownership of the property to the landlord. 

A large franchise might utilize a ground lease to expand its business into urban areas with high real estate costs. This would allow them to build a branch in a densely populated area without having to purchase expensive land upfront. 

Because the ground lease process often includes development, tenants may need to take out loans to cover construction and other related costs. 

Two main types of ground lease contracts account for the risks associated with loans: 

• Subordinated ground leases put the loan lender’s claims to the property above the landlord's. This creates a higher risk of losing the land if the tenant defaults, but allows the landlord to negotiate higher rent payments with the tenant. In turn, the tenant may be able to more easily secure a loan with better interest rates. 
• Unsubordinated ground leases give the landlord priority above the lender. This is a more stable and common choice for landlords, but it may make it more difficult for tenants to secure a loan. As an insensitive, landlords may offer lower rent prices to tenants who accept an unsubstantiated ground lease. 

FAQs 

Who owns the building in a ground lease?

Generally, tenants in a ground lease only pay rent on the land itself and retain ownership of any improvements they make, such as buildings they construct on the property. However, ownership of those improvements transfers to the landlord when the ground lease expires. 

What happens if you default on a ground lease?

That depends on the context of the lease and which party defaults. In a subordinated ground lease, the landlord risks losing ownership of the land if a tenant defaults on a loan. Conversely, the tenant could potentially lose the building they built if the landlord defaults on debts.

Who pays property taxes in a ground lease agreement?

While it depends on the lease agreement, tenants are typically responsible for property taxes, insurance, maintenance, and repairs.

What's the difference between ground leases vs. land leases?

Both ground and land leases rent out land to a tenant. However, ground leases tend to permit tenants to develop the land, while a land lease might not.