In brief
- 1
Terms run 30 to 99 years, depending on what gets built. Retail and commercial ground leases run 30-50 years, office and industrial 40-60, and major developments 50-99.
- 2
Credit and term set the price. Per CoStar Group, an investment-grade tenant with 30+ years left trades at a 3.5-4.5% cap rate, 4.0-5.0% with 15-30 years left, and a non-investment-grade tenant with 30+ years at 5.0-6.5%.
- 3
The landowner gets the building back at the end. At lease expiration the building and all improvements go to the landowner at no additional cost, though a building that is obsolete by then is one of the lessor's risks.
- 4
The tenant keeps its capital for the building. There is no land purchase, and ground rent is fully deductible as an operating expense. In exchange the tenant gets no benefit from land appreciation and may lose the building at lease end.
- 5
The escalation clause is where each side carries risk. Rent rises by fixed increases of 2-3%, CPI, a fair market value reset or a percentage of the tenant's gross sales. The landowner risks a below-market rent lock-in; the tenant carries the escalation exposure.
What is a ground lease
It is a long-term lease of the land only. The tenant leases the dirt and, in almost every case, puts up the building on their own dime. When the lease ends, the building usually goes back to the landowner.
How the structure works
Ground Lessor (Landowner):
- Owns the land
- Leases for 30-99 years
- Receives ground rent
- Gets building at lease end
Ground Lessee (Tenant):
- Leases the land
- Owns building during lease term
- Pays ground rent
- Invests in construction
Why anyone uses this structure
What the landowner gets
- Retain Ownership: Keep appreciating asset
- Stable Income: Long-term, predictable cash flow
- Minimal Management: Tenant handles operations
- Building Reversion: Receive building at lease end
What the tenant gets
- Lower Capital Requirement: No land purchase
- Preserve Capital: Deploy funds for building/operations
- Prime Locations: Access land that's not for sale
- Tax Benefits: Rent is fully deductible
The terms you will see
How long the lease runs
- Retail/commercial: 30-50 years
- Office/industrial: 40-60 years
- Major developments: 50-99 years
How the rent goes up
| Method | Description |
|---|---|
| Fixed Increases | 2-3% annual or periodic |
| CPI Adjustment | Tied to inflation |
| FMV Reset | Periodic revaluation |
| Percentage Rent | % of tenant gross sales |
Buying a ground lease as an investment
What draws investors to them
1. Ultra-Stable Income: Long leases, credit tenants
2. Truly Passive: No management, no TI, no capex
3. Defensive: Senior position; land doesn't depreciate
What they trade at
| Tenant Credit | Remaining Term | Cap Rate |
|---|---|---|
| Investment Grade | 30+ years | 3.5-4.5% |
| Investment Grade | 15-30 years | 4.0-5.0% |
| Non-Investment Grade | 30+ years | 5.0-6.5% |
Three ways I have seen investors play it
Strategy 1: Long-Term Hold
Buy with strong tenant, collect rent for decades, receive building at reversion.
Strategy 2: Lease Extension Play
Buy shorter-term lease, negotiate extension, create significant value.
Strategy 3: Credit Arbitrage
Acquire below investment grade, tenant improves credit over time, cap rate compresses.
Where the risk sits
Ground Lessor Risks:
- Below-market rent lock-in
- Tenant default
- Building obsolescence at reversion
Ground Lessee Risks:
- No land appreciation benefit
- Rent escalation exposure
- Building may be lost at lease end
Lornell Real Estate assists investors with ground lease transactions across Central Massachusetts. Contact us to discuss investment or monetization strategies.
Ground Lease is a long-term agreement where a tenant leases land from a landowner to construct a building, with the building typically reverting to the landowner at the lease's expiration.
Sources: CoStar Group, IRS, National Association of Realtors.
Limitations: Cap rates, pricing, and transaction volume cited reflect market-level averages at the time of publication and may not apply to individual properties. Property values depend on asset-specific factors including condition, tenant credit quality, lease terms, location, and financing structure. Tax rules (including 1031 exchange provisions, capital gains rates, and depreciation schedules) change with legislation. This article does not constitute investment, tax, or legal advice. Consult a qualified CPA, attorney, and commercial real estate broker before making transaction decisions.
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