Owning a building but not the land underneath it means you hold what the law calls a leasehold estate: the right to use the land, construct or own improvements on it, and profit from them for a set number of years, while someone else keeps title to the ground itself.1Legal Information Institute (LII) / Cornell Law School. Leasehold The contract that creates this split is a ground lease. Your rights are real, recorded, and financeable, but they come with an expiration date, and that single fact changes how you finance the building, how you’re taxed, what the property is worth when you sell, and what you have left when the lease runs out.
This arrangement shows up in manufactured home communities, in some condominium and co-op buildings (especially in dense urban areas), and routinely in major commercial development, where ground leases often run 50 to 99 years. The mechanics below apply across all of them, though the stakes and the protections differ.
The Lease Terms That Control Everything
A ground lease is a contract, and its specific provisions govern almost every aspect of what you actually own. Four provisions deserve the hardest look before you sign or buy in.
Term length. Ground leases typically run 20 to 99 years. The remaining term determines whether lenders will finance the property, what it will sell for later, and whether you’ll recover your investment in the building before the clock runs out.
Rent escalation. Most ground leases build in periodic increases, often tied to an inflation index or to a reappraisal of the land’s market value. In high-demand areas, reappraisals have produced sharp rent spikes that caught building owners off guard. Knowing exactly when and how rent can rise is one of the most important parts of evaluating the lease.
Who pays what. The building owner typically pays property taxes on the building, insures it, and handles maintenance. The landowner pays taxes on the land. Ambiguity here produces disputes, so the lease should spell these obligations out.
Use restrictions. The lease may confine the property to residential use or a specific commercial activity, and it may limit your ability to sublet, assign, or make structural changes.
Financing a Building on Leased Land
Getting a mortgage on a building you own on someone else’s land is harder and more expensive than financing a fee simple property. Lenders carry extra risk because your ownership has an expiration date, and if the landowner creates problems, the lender’s collateral is in jeopardy. Conventional and government-backed mortgages are available, but only when the lease meets specific requirements.
Fannie Mae Rules
Fannie Mae will purchase leasehold mortgages on one- to four-unit homes, condos, co-ops, and manufactured homes in approved projects, provided the lease satisfies a detailed set of conditions. The lease’s unexpired term must exceed the mortgage maturity date by at least five years. It must be recorded in local land records, must allow unlimited assignment and subletting, and cannot impose credit reviews or qualifying criteria on future buyers. It must also give the lender at least 30 days’ notice of any default and 30 days to cure or begin foreclosure before the lease can be terminated.2Fannie Mae. Special Property Eligibility and Underwriting Considerations: Leasehold Estates
For loans sold to Fannie Mae with new leases entered into on or after September 1, 2025, the land itself cannot be encumbered by any prior mortgage or lien unless the lienholder has agreed in writing not to disturb the lease if it takes ownership of the land.2Fannie Mae. Special Property Eligibility and Underwriting Considerations: Leasehold Estates That written commitment, called a non-disturbance agreement, is one of the most important protections a building owner on leased land can have.
FHA Rules
FHA-insured mortgages on leasehold properties have their own minimum term requirements. Generally, the lease must have at least 75 years remaining from the date the mortgage is executed. A lease originally written for 99 years or more qualifies with any remaining term as long as it is renewable on the same terms. For leases from government agencies or tribal entities, the remaining term can be as short as 50 years.3HUD. Chapter 3 – Ground Leases
Why It Costs More
Even when a leasehold property qualifies for a mortgage, expect a longer and costlier process. Lenders typically require specialized title insurance, leasehold appraisals, and legal review of the ground lease itself. Market participants in leasehold transactions have reported capitalization rate spreads of 50 to 200 basis points above comparable fee simple properties, which translates directly into how lenders price the risk. Some lenders will not make leasehold loans at all, which narrows your options.
Tax Treatment
Deducting Ground Rent
If you own a home on leased land, you may be able to deduct your ground rent payments as mortgage interest, but only if the arrangement qualifies as a redeemable ground rent. All four of these conditions must be met: your lease, including renewals, runs longer than 15 years; you can freely assign the lease; you have a present or future right under state or local law to end the lease and buy the landowner’s entire interest for a specific price; and the landowner’s interest functions primarily as security for the rent payments.4Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
If the ground rent fails any of those tests, the IRS treats it as nonredeemable, and those payments cannot be deducted as mortgage interest. They may still be deductible as a business expense if the property is used for business or as a rental.4Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
Depreciation
Building owners on leased land can depreciate their building and any capital improvements using the same recovery periods as fee simple owners. Federal regulations specifically state that depreciation of improvements on leased property is calculated “without regard to the period of the lease.”5eCFR. 26 CFR 1.167(a)-4 – Leased Property A residential rental building gets a 27.5-year recovery period and a commercial building gets 39 years, regardless of whether your lease has 30 years left or 90.6Internal Revenue Service. Publication 946, How To Depreciate Property
What Happens to Value Over Time
A building on leased land is almost always worth less than the same building on land you own outright, and the discount grows steeper as the remaining lease term shrinks. A buyer is purchasing a depreciating asset with an expiration date, not a permanent piece of real estate.
Financing hurdles compound the problem. Fewer lenders will touch a leasehold, which means fewer qualified buyers, which means less competition and lower sale prices. As the lease moves into its final 20 to 30 years, conventional financing gets increasingly hard to obtain. Fannie Mae’s rule that the lease must outlast the mortgage by five years means a lease with 35 years remaining can only support a 30-year mortgage, and anything shorter starts eliminating standard loan products entirely.2Fannie Mae. Special Property Eligibility and Underwriting Considerations: Leasehold Estates
If you are considering buying a building on leased land, look at the remaining lease term the way you would look at the odometer on a used car. A 90-year lease that has already burned through 70 years is not a 90-year lease. It is a 20-year countdown, and both lenders and future buyers will price it that way.
Risks Beyond Resale
Building owners on leased land face several risks that fee simple owners never think about.
The most dangerous is a landowner default. If the landowner carries a mortgage on the land and stops paying, the lender could foreclose. In that scenario, you may lose the building you paid for even though the default had nothing to do with you. The best protection is a recorded non-disturbance agreement from the landowner’s lender, which guarantees the lease survives foreclosure. Fannie Mae now requires one for new leases, but older ground leases may lack this protection entirely.2Fannie Mae. Special Property Eligibility and Underwriting Considerations: Leasehold Estates
Rent escalation is another significant risk. Ground rent that seems affordable at signing can become burdensome after decades of inflation adjustments or market reappraisals. For manufactured home owners without a long-term written lease, lot rent increases can arrive with minimal notice and no cap. Many states have enacted some form of rent notice requirements or other tenant protections for manufactured home communities, but the specifics and the strength of those protections vary widely. Before buying any building on leased land, model out the worst-case rent trajectory for the period you plan to own.
Many ground leases also contain restrictions that catch owners by surprise years later, from limits on renovations to approval requirements for any transfer. Read the lease as carefully as a purchase contract. In many ways it is more consequential, because it controls what you can do with the building, who you can sell it to, and what happens to your investment when the term runs out.
What Happens When the Lease Ends
Unless the lease says otherwise, the default outcome at expiration is reversion: the building automatically becomes the landowner’s property at no cost. After decades of owning, maintaining, and paying taxes on the building, the lessee walks away with nothing and the landowner becomes full owner of both land and structure. This is the outcome that makes a ground lease fundamentally different from other real estate investments, and it is the outcome many building owners do not think about until it is too late.
Well-drafted leases address this with one or both of the following:
- An option to renew, letting the building owner extend the lease for an additional term, usually at renegotiated rent. Experts in ground lease transactions recommend starting renewal negotiations no later than 20 to 30 years before expiration.
- An option to purchase, letting the building owner buy the land at a predetermined price or at fair market value and convert the leasehold into full fee simple ownership.
If your ground lease contains neither provision, reversion is where you are headed. For anyone evaluating a building on leased land, the end-of-lease terms deserve as much scrutiny as the purchase price. A building you will eventually lose for free is not worth what a permanent one is, and the offer you make should reflect that.