A ground lease is a long-term agreement in which a landowner leases bare land to a tenant who builds on it, owns those buildings during the lease, and then hands everything back when the term ends. The land stays with its original owner the entire time. The tenant finances construction, operates the property, and treats the site like their own for day-to-day purposes, even though they never hold title to the dirt beneath. These arrangements show up most often in commercial real estate, where developers want prime locations without tying up capital in a land purchase, and they typically run for decades.
The Split Between Land and Improvements
The defining feature is a clean separation of ownership. The landowner, sometimes called the ground lessor, keeps title to the land and holds what’s known as a leased fee interest: the right to collect rent and the right to get the land back at the end. The tenant, or ground lessee, holds a leasehold interest, which functions like ownership of the buildings and the right to use the site for the lease term. It is not the same as owning the land outright in fee simple, and that distinction affects financing, resale value, and what happens at expiration.
A tenant’s responsibilities under a ground lease go well beyond what a standard commercial renter deals with. You pay rent, yes, but you also finance construction, pull building permits, maintain code compliance, carry insurance on the structures, and pay property taxes on both the land and the improvements. The arrangement works more like ownership than tenancy for operational purposes, which is exactly why developers accept the trade-off.
How Long Ground Leases Run and How Rent Increases
Ground leases are long by necessity. A tenant spending millions on construction needs enough time to recoup the investment and earn a return. Terms of 50 to 99 years are standard in commercial ground leases, with 99 years the most common benchmark. Shorter terms exist for less capital-intensive uses, but lenders and tenants both push for longer durations when significant construction is involved.
Rent usually starts at a percentage of the land’s appraised value and climbs over time. Three escalation mechanisms dominate:
- Fixed percentage increases, where rent rises by a set percentage at regular intervals, such as a 10% bump every five years. Simple to administer, though the increases can overshoot or undershoot actual inflation.
- Step-up schedules, where rent follows a graduated pattern, often with smaller increases early and larger ones later. A lease might call for 5% annual increases in the first decade, 7% in the next ten years, and 10% after that.
- CPI-linked adjustments, where rent tracks the Consumer Price Index or another economic benchmark. Many leases cap annual adjustments within a range to prevent wild swings.
Some ground leases also build in periodic fair market value resets every 10 to 25 years, where rent is reappraised against the land’s current value. These resets can produce dramatic increases in appreciating markets and are among the most contested points in any ground lease negotiation. When the parties cannot agree on fair market value, the lease typically triggers an appraisal process using independent, certified appraisers whose determination becomes binding.
Subordinated and Unsubordinated Ground Leases
One of the most consequential choices in any ground lease comes down to a single question: can the tenant’s lender foreclose on the land itself if the tenant defaults?
In a subordinated ground lease, the landowner agrees to place their interest behind the tenant’s lender. If the tenant defaults on a construction loan or mortgage, the lender can foreclose on both the improvements and the underlying land. Landowners rarely want this because it puts their property at risk if the tenant’s business fails. When they do agree, they typically demand higher rent to compensate for the added risk.
In an unsubordinated ground lease, the landowner’s interest stays senior. If the tenant defaults, the lender can pursue the improvements but cannot take the land. This protects the landowner but creates a financing problem: many lenders will not issue construction loans on ground-leased land if they cannot foreclose on the entire property as collateral. Unsubordinated leases are more common because most landowners refuse to gamble their land on a tenant’s financial performance, but tenants often face higher borrowing costs or limited lender options as a result.
The subordination question shapes nearly every other part of the deal: the interest rates the tenant pays, the loan-to-value ratios lenders will accept, and the rent the landowner can charge. Getting it wrong at the outset can make an otherwise viable project unfinanceable.
Why Landowners and Tenants Agree to This Structure
Landowners use ground leases to generate steady income without parting with their land. A family, institution, or government agency sitting on valuable property can collect rent for decades while the land appreciates. When the lease eventually expires, they get the land back, often with functioning buildings on it. Compared to an outright sale, a ground lease avoids triggering capital gains taxes on the land’s appreciation, since no sale occurs. The rental income is taxable, but the owner keeps both the revenue stream and the underlying asset.
Ground leases are especially common on land held by government agencies, religious institutions, and universities, which often cannot or will not sell but want their land developed productively. Transit agencies use them to develop property near stations, generating revenue while retaining long-term public control. Tribal land held in federal trust often cannot be sold at all, making ground leases the only path to development.
For tenants, the appeal is simple: you skip the largest upfront cost in any development project. Instead of buying land at market price, you lease it and direct capital toward construction and operations. In expensive markets where land alone might represent 30% to 50% of total project cost, that freed-up capital can be the difference between a project penciling out and one that does not. Ground leases also let developers reach locations they could not otherwise afford, such as a downtown block owned by a city or a waterfront parcel held by a port authority.
Financing a Building on Leased Land
Securing a loan for a building on ground-leased land is harder than financing a project where the developer owns both land and improvements. The tenant’s collateral is a leasehold interest, not fee simple ownership, and lenders treat that as riskier. If the ground lease is terminated for any reason, the lender’s collateral could vanish overnight. Because of that, lenders demand specific protective provisions before underwriting a leasehold mortgage.
Freddie Mac’s multifamily lending guide sets out what institutional lenders typically require, and these provisions have become the industry baseline:1Freddie Mac. Multifamily Seller/Servicer Guide Chapter 30 – Ground Lease Mortgages
- Written notice of any tenant default to the lender before the landowner exercises remedies.
- Cure rights that let the lender step in and fix the tenant’s default. For missed rent, lenders typically get at least 10 extra days beyond the tenant’s grace period, and at least 60 additional days for other defaults. If the default cannot be cured by the lender at all, the lease cannot be terminated as long as rent keeps getting paid.
- A new lease right, so if the ground lease terminates for any reason other than natural expiration, the landowner must offer the lender a new lease on the same terms. This is the backstop lenders care about most.
- Non-disturbance protections for commercial subtenants occupying the building, so a lease termination does not wipe out the building’s rent rolls.
Tenants negotiating a ground lease should treat lender-required provisions as non-negotiable from the start, because retrofitting them later usually requires the landowner’s cooperation, which may come at a price.
Tax Treatment
Ground leases produce distinct tax consequences on each side, and the details affect project economics.
Rent and Property Tax Deductions for Tenants
A business tenant can deduct ground lease rent as an ordinary business expense under the same rules that apply to any commercial rental. The Internal Revenue Code allows a deduction for rentals paid as a condition of continued use of property in which the taxpayer has no equity.2Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses Property taxes paid by the tenant are also deductible. Together, these deductions can bring the effective cost of a ground lease well below the stated rent.
Depreciating the Building You Built
Tenants who construct on leased land can depreciate those improvements even though they do not own the underlying land. The IRS treats buildings erected on leased property as depreciable assets with the same recovery period that would apply if the tenant owned the land outright.3Internal Revenue Service. Publication 946 (2025), How To Depreciate Property For a commercial building, that is typically a 39-year recovery period under the modified accelerated cost recovery system.4Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System If the lease term is shorter than the recovery period, the tenant may still depreciate over the standard period rather than being forced to match the lease term, though the specifics depend on the lease structure and any renewal options.
Landowner Side
Landowners collect rental income, which is taxable as ordinary income. Because the land has not been sold, no capital gains event occurs. The owner retains the asset, captures appreciation, and defers any capital gains recognition indefinitely. That deferral is one of the primary reasons an owner picks a ground lease over an outright sale.
Environmental Liability Does Not Follow the Lease
Environmental contamination catches many ground lease tenants off guard. Under federal law, both owners and operators of a facility can be held liable for cleaning up hazardous substance contamination. That liability is strict and joint and several, meaning a party can be held responsible for the full cost of remediation even if they did not cause the contamination, as long as they own or operate the site.5Office of the Law Revision Counsel. 42 U.S. Code 9607 – Liability
In a ground lease, the landowner qualifies as an owner and the tenant qualifies as an operator. Both can be on the hook. Well-drafted ground leases address this by requiring the tenant to indemnify the landowner for contamination the tenant causes, while the landowner takes responsibility for pre-existing contamination. An indemnification clause between private parties, however, does not limit federal liability. The government can still pursue either side for cleanup costs, and if the responsible party is insolvent, the other may end up paying regardless of what the lease says. Environmental due diligence before signing a ground lease is not optional.
Transfer, Assignment, and Recording
Most ground leases restrict the tenant’s ability to assign or transfer the leasehold interest without the landowner’s consent. The specific standard matters. Some leases give the landowner sole discretion to approve or reject a transfer, while others require that consent not be unreasonably withheld. From a tenant’s perspective, the reasonableness standard is far preferable, because it prevents a landowner from blocking a legitimate sale of the tenant’s business or improvements for arbitrary reasons.
Tenants should also record a memorandum of lease in the county land records. This short document does not disclose every lease term, but it puts the public on notice that a leasehold interest exists. Recording protects the tenant if the landowner later tries to sell the land to a buyer claiming ignorance of the lease, and title insurance companies typically require a recorded memorandum before issuing leasehold title policies. A memorandum can also preserve specific tenant rights, such as purchase options or rights of first refusal, as covenants that run with the land and bind future owners.
What Happens When the Lease Ends
Reversion is the default outcome. When the ground lease ends, ownership of the improvements transfers to the landowner at no cost. The tenant walks away from the buildings they financed and built, and the landowner gains a fully improved property. That trade-off is baked into every ground lease from day one, and it is why lease terms run so long. A 99-year lease gives the tenant enough time to build, operate, profit from, and fully depreciate the improvements before handing them over.
For very long leases, the reversion can create a perverse incentive. As the expiration date approaches, tenants have little reason to maintain buildings they are about to lose. Deferred maintenance in the final years of a ground lease is common, and landowners sometimes inherit structures that need expensive roof replacements, system overhauls, or demolition. Some leases address this by requiring the tenant to demolish improvements and return the land to its original condition before the lease ends.
Modern ground leases often include ways to soften the reversion. Extension options let the tenant renew for additional terms, sometimes at renegotiated rent. Purchase options allow the tenant to buy the land outright at a predetermined price or fair market value. A right of first refusal gives the tenant the ability to match any third-party offer if the landowner decides to sell. If you are negotiating a ground lease, push for at least one of these protections. Renegotiating from a position of weakness as expiration looms is exactly as painful as it sounds.