A long-term land lease, usually called a ground lease, gives a tenant the right to use and build on a parcel of land for decades while the landowner keeps title to the soil beneath. These agreements run commonly between 30 and 99 years and sit behind many office towers, shopping centers, and other large commercial projects, because the developer avoids the enormous upfront cost of buying the land outright. At the end of the term, the land and whatever is built on it typically revert to the owner, which is why the structure, duration, and financial terms of the lease matter so much on both sides.
The Two Property Interests You Need to Understand
A ground lease splits one piece of land into two legal interests that exist at the same time. The landowner holds a fee simple interest: full, permanent ownership with no expiration. The tenant holds a leasehold interest, which is the right to occupy and use the land for the agreed term. Both are real, both have value, and each can be financed, taxed, and sold on its own. Lenders can make loans secured by the leasehold. The landowner can sell the fee with the lease attached. A buyer can purchase the remaining lease term from the tenant. The landowner’s right to take back possession when the lease ends is called a reversionary interest, and it stays legally protected the entire time the tenant occupies the property.
Lease Length, Renewal Options, and What Happens at the End
The term has to be long enough for the tenant to build improvements, operate them profitably, and recover the investment before time runs out. Thirty to ninety-nine years is the usual range for commercial ground leases.
Renewal options carry much of the negotiating leverage. A well-drafted ground lease includes one or more extension options, sometimes adding 20 or 25 years each. These options protect a tenant who has put serious capital into buildings on the site. Without a renewal provision and without a purchase option, the tenant faces a cliff at expiration: the buildings transfer to the landowner, and the tenant walks away with nothing. Lenders look hard at renewal terms, because a loan secured by a leasehold gets riskier as the remaining term shrinks.
Reversion is the other end of that same question. The standard arrangement hands the landowner any structures still standing when the lease ends. The agreement should say whether buildings must remain in place, be demolished, or meet some minimum condition. Some leases require the tenant to restore the land to its original state, which can be enormously expensive on an industrial site. Others deliver the landowner a fully functional building. Tenants who gloss over the reversion clause during negotiation tend to regret it decades later.
How Rent Is Set and How It Changes
Ground lease rent generally starts with a fixed base amount that gives both sides predictability early on. Because the lease stretches across decades, that base erodes in real value without some adjustment mechanism. Three approaches dominate:
- Annual escalations tied to the Consumer Price Index
- Fixed percentage increases, often 2% to 3% per year
- Periodic rent resets based on a fresh appraisal of the land’s fair market value
CPI and fixed-percentage adjustments are simple to administer, but neither captures large shifts in land value. A parcel that was farmland at signing can sit in a booming commercial corridor 25 years later. Rent reset clauses handle that by requiring a new appraisal at set intervals, commonly every 20 or 25 years, and setting rent at a percentage of current fair market value. That percentage usually falls between 5% and 6%.
Resets are also where fights break out. The lease needs to specify the valuation method in detail: whether the land is appraised as if vacant and unencumbered by the lease, what happens when the parties’ appraisals diverge, and which dispute resolution process controls. Getting that language right at signing is far cheaper than litigating it 20 years in.
Operating Costs, Permitted Uses, and Who Owns the Buildings
Most commercial ground leases run on a triple net basis. The tenant pays rent plus property taxes, insurance premiums, and all maintenance costs. That gives the landowner a clean, predictable income stream and shifts essentially every operating expense to the tenant.
The lease should also define what the tenant can build and how the land can be used. A clause limiting the property to commercial retail means the tenant cannot later convert to apartments without the landlord’s consent. Tight use restrictions constrain future flexibility, so tenants building for the long term should negotiate permitted uses broadly enough to absorb market shifts.
During the lease term, improvement ownership generally rests with the tenant. That is not just a technical point. It determines who claims tax depreciation, who carries insurance, and who bears liability if someone is injured on the property. The agreement has to state plainly that the tenant owns the buildings for the duration of the lease, and it must describe what happens to those structures at expiration. Vague language on this point can produce an ownership dispute that clouds title and freezes financing.
Subordinated vs. Unsubordinated: the Highest-Stakes Choice
This distinction trips up more people than almost any other ground lease concept, and it carries real financial consequences.
In an unsubordinated ground lease, the landowner’s fee interest keeps priority over any mortgage the tenant takes out. If the tenant defaults on a construction loan, the lender can foreclose on the leasehold, but the landowner’s ownership of the land is untouched. This is the safer arrangement for the landowner.
In a subordinated ground lease, the landowner agrees to sit behind the tenant’s lender in priority. The lender’s mortgage now effectively encumbers the land itself, not just the leasehold. If the tenant defaults and the lender forecloses, the landowner can lose the property. Lenders often demand subordination as a condition of financing because it hands them the land as additional collateral and sharply reduces their risk.
A landowner who is asked to subordinate should insist on protections: the right to receive notice of any tenant default, the opportunity to cure it before the lender can foreclose, and often a cap on the loan amount that can be secured by the subordinated interest. Treat this as one of the biggest decisions in the whole transaction.
Financing a Leasehold
Most tenants who sign ground leases plan to build something expensive, which means they need financing. A leasehold mortgage lets the tenant pledge the leasehold interest as collateral for a construction or permanent loan. The unique risk for the lender is that if the tenant defaults under the lease and the landowner terminates it, the collateral vanishes. The building still stands, but the right to occupy the land beneath it is gone.
Institutional lenders manage that risk by requiring specific protections in the ground lease itself. The most important are notice and cure rights: the landowner must notify the lender whenever the tenant defaults, and the lender gets a window to step in and fix the problem before the lease can be terminated. Many leases also give the lender the right to obtain a new lease directly from the landowner if the original lease is terminated, preserving the lender’s position.
SNDA Agreements
When the landowner already has a mortgage on the fee interest, the tenant’s leasehold can be at risk if the landowner defaults. A Subordination, Non-Disturbance, and Attornment agreement handles this. The tenant subordinates the lease to the landowner’s mortgage. In exchange, the landowner’s lender promises not to disturb the tenant’s possession if it forecloses. The tenant also agrees to recognize the foreclosing lender as the new landlord. Without this agreement, a subordinate lease can be wiped out in a foreclosure even if the tenant has been paying rent on time. The non-disturbance promise has to come directly from the lender, since the lender is not a party to the lease and is not bound by anything the landlord and tenant negotiated between themselves.
Estoppel Certificates
Before closing a loan secured by a leasehold, lenders require an estoppel certificate from the landowner. It is a written confirmation of the key facts about the lease: the current rent, the term, whether any defaults exist, whether the lease has been modified, and whether the landowner has subordinated the fee interest to any other mortgage or lien.1Freddie Mac. Ground Lessors Estoppel Certificate The certificate locks the landowner into those statements. Any financing involving a ground lease stalls if the landowner will not provide one, so the lease should include a clause requiring the landowner to deliver estoppel certificates within a reasonable timeframe on request.
Environmental Liability on Leased Land
Federal environmental law does not draw sharp lines between landlord and tenant. Under the Comprehensive Environmental Response, Compensation and Liability Act, both the current owner and the current operator of a facility can be held liable for the full cost of cleaning up hazardous substance contamination.2Office of the Law Revision Counsel. 42 U.S. Code 9607 – Liability In a ground lease, the landowner is the owner and the tenant is often the operator. Both can end up on the hook regardless of who caused the problem.
A well-drafted lease addresses this with cross-indemnification clauses. The tenant indemnifies the landowner for contamination the tenant causes, and the landowner indemnifies the tenant for pre-existing conditions and contamination migrating in from neighboring properties. These obligations should expressly survive expiration or termination, because environmental claims often surface years after the responsible party has left. Most commercial ground leases require a Phase I environmental assessment before signing, to establish a baseline condition of the property. If that assessment flags concerns, a Phase II assessment with soil and groundwater sampling follows. Without a baseline, neither side can prove who caused later contamination.
Fires, Disasters, and Eminent Domain
A ground lease needs to address two events that can destroy the value of the property overnight: a casualty like a fire or natural disaster, and a government taking through eminent domain.
For casualties, the lease should specify whether the tenant is obligated to rebuild, who controls the insurance proceeds, and what happens to the rent obligation during reconstruction. If the lease requires rebuilding but routes insurance proceeds through the landowner, the tenant can face a cash flow crisis at the worst possible moment.
Condemnation is trickier. When the government takes the property, it pays a single award based on the land’s value as if no lease existed. The landowner and tenant then split the award between themselves. Without a condemnation clause, the tenant’s share is generally the “bonus value,” which is the difference between market rent and the contract rent for the remaining lease term. Many commercial ground leases instead assign the entire condemnation payment to the landowner. A tenant accepting that language should understand the tradeoff and expect the landowner to offer lower rent or other concessions in return. Either way, the allocation needs to be settled upfront, not after the government shows up with a check.
Tax Treatment of What You Build
Federal tax rules on buildings constructed on leased land hold some surprises. Improvements to nonresidential real property placed in service by the tenant are depreciated under the Modified Accelerated Cost Recovery System over a 39-year recovery period using the straight-line method, even if the remaining lease term is shorter than 39 years.3Internal Revenue Service. Publication 946, How To Depreciate Property A tenant with 25 years left on the lease still depreciates a new building over 39 years for tax purposes.
Qualified improvement property, which covers most interior improvements to nonresidential buildings placed in service after the building was first put into use, gets a faster 15-year recovery period.3Internal Revenue Service. Publication 946, How To Depreciate Property Items like new roofing, HVAC systems, fire protection, and security systems also qualify for accelerated treatment through the Section 179 deduction, subject to annual dollar limits and a cap tied to the taxpayer’s active business income.4Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets Bonus depreciation is back at 100% for qualified property placed in service in 2026 after recent legislation reversed an earlier phase-down.5Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System For a tenant building new, the interaction of recovery periods, bonus depreciation, and Section 179 gets complicated fast; a tax professional should map it out before construction starts.
Signing, Recording, and Transferring the Lease
The Statute of Frauds, recognized in every state, requires any lease longer than one year to be in writing and signed. For a ground lease, every person or entity with legal authority over the property must sign, and a notary public acknowledges the signatures. Notary fees for acknowledgments are modest, typically between $2 and $25 per signature depending on the state.
After signing, the parties should record notice of the lease with the local county recorder or registrar of deeds. Rather than filing the full agreement and putting financial details into the public record, most parties record a memorandum of lease: a shorter document identifying the parties, describing the property, stating the term, and noting provisions that affect title, such as purchase options or extension rights. Recording creates constructive notice, meaning anyone who later buys the land or lends against it is legally presumed to know the lease exists. Without recording, a tenant risks losing the leasehold to a later buyer who claims no knowledge of it.
A tenant may eventually want to sell the leasehold or bring in a subtenant. An assignment transfers the tenant’s entire remaining interest to a new party, who steps into the original tenant’s shoes. A sublease transfers only part of the space or part of the remaining term, with the original tenant staying on the lease. Most ground leases require the landowner’s consent for either, with a clause saying consent cannot be unreasonably withheld. Reasonableness generally turns on the proposed transferee’s financial strength and track record. The lease should spell out the approval criteria, the timeline for the landowner’s response, and whether the original tenant remains liable after an assignment. Vague language here is how deals get tied up for months.