In a ground lease, the tenant owns the building and the landlord owns the land. That split lasts for the life of the lease, which is often 50 to 99 years. When the lease ends, the building reverts to the landlord at no cost, and the two interests merge back into a single ownership of land and improvements.
What the Tenant Actually Owns
A ground lease separates land ownership from building ownership. The tenant leases bare land, constructs improvements on it, and holds legal title to everything built on that land for the life of the lease. That includes the building, parking structures, landscaping, and any other permanent additions. This interest is called a leasehold interest, and for most practical purposes the tenant is the building’s owner. They control it, maintain it, collect rent from subtenants occupying space in it, and carry it as an asset on their balance sheet.
Because the tenant holds title to the improvements, they can borrow against them. Leasehold mortgages work like conventional mortgages, except the collateral is the tenant’s interest in the building and the lease itself rather than a fee interest in land. Lenders look at how many years remain on the ground lease when they underwrite. As the remaining term shrinks, so does the value of the collateral, which is why most lenders want the loan fully repaid well before the lease ends.
To put the world on notice of the arrangement, tenants typically record a memorandum of lease with the local recorder’s office. The memorandum identifies the parties, describes the property, states the lease term, and alerts anyone searching title records that the tenant holds a recognized interest in the property. Title companies routinely require this recording before issuing leasehold title insurance.
What the Landlord Actually Owns
While the tenant runs the building, the landlord holds the most durable form of property ownership: fee simple title to the land. The landlord cannot occupy the building or interfere with the tenant’s use of it during the lease term, but the land itself never changes hands. What the landlord holds is more precisely called a leased fee interest, which is fee simple title encumbered by the tenant’s lease. The landlord receives ground rent through the term and keeps a long-term position as the landowner.
Ground leases typically run from 50 to 99 years, though terms as short as 20 years exist for simpler projects. The length matters because the tenant needs enough time to build on the land, operate the improvement profitably, and recoup their investment before handing everything back. Hotels, office towers, and large retail developments almost always sit at the longer end of that range.
Who Pays Taxes and Depreciates the Building
Ground leases are almost always structured as net leases, meaning the tenant pays the property taxes on the entire site. A common misconception trips up newcomers here: despite the split in ownership, assessors in most jurisdictions value and tax the property as a single unit rather than issuing separate bills for the land and the building. The ground lease itself puts the full tax bill on the tenant, and landlords enforce this through annual compliance reporting. If the tenant stops paying, the local taxing authority can place a lien on the property, which in practice threatens the tenant’s leasehold interest and everything built on it.
The tenant also typically carries comprehensive insurance on the structure and names the landlord as an additional insured party. Between taxes, insurance, maintenance, and capital expenditures, the tenant bears nearly all of the economic burdens of ownership during the lease term.
The IRS treats the tenant as the building’s owner for depreciation purposes. Even though the tenant doesn’t own the land, they can depreciate the building and other permanent improvements they construct on the leased property. The improvements are treated as separate depreciable assets, and the recovery period and method match what would apply if the tenant had placed the original property in service at the same time as the improvement.1Internal Revenue Service. Publication 527, Residential Rental Property For most commercial buildings, this means using the Modified Accelerated Cost Recovery System over a 39-year recovery period for nonresidential property or 27.5 years for residential rental property.2Internal Revenue Service. Topic No. 704, Depreciation
How Default Can Change Who Owns What
Ownership during a ground lease is stable only as long as the tenant performs. If the landlord terminates the ground lease for default, the tenant’s entire interest in the building evaporates. Every subtenant lease, every leasehold mortgage, and every dollar of equity in the improvements is at risk, and the building passes to the landlord.
Leasehold lenders insist on protective provisions for exactly this reason. The most important are cure rights: if the tenant defaults, the lender gets notice and an independent period to step in and fix the problem, typically longer than the cure period the tenant receives. If the default cannot be cured and the ground lease is terminated, the lender often has the right to demand a new ground lease from the landlord on the same terms as the original. That “new lease” provision is the lender’s backstop against total loss.
The default can also run the other direction. A ground lease can be subordinated or unsubordinated, and the choice determines what a lender can reach. In a subordinated ground lease, the landlord agrees to let the tenant’s lender place a lien on both the building and the underlying land. Financing is easier for the tenant because the lender gets the entire property as collateral, but if the tenant defaults on the loan, the lender can foreclose on the land itself, and the landlord loses their property. Landlords who agree to subordination usually demand higher ground rent or other concessions to compensate.
In an unsubordinated ground lease, the landlord’s fee interest stays senior to any mortgage the tenant takes out. The lender can foreclose only on the leasehold interest and the building, not the land. A buyer at that foreclosure sale steps into the tenant’s shoes and must continue performing under the ground lease. The land stays with the original landowner.
There’s a parallel risk the other way: if the landlord has borrowed against the land and defaults, a foreclosure could wipe out the ground lease and strip the tenant of the right to occupy the building they own. Tenants protect against this with a subordination, non-disturbance, and attornment agreement (SNDA), a three-party agreement that commits the landlord’s lender to honor the ground lease after foreclosure in exchange for the tenant recognizing the new owner as its landlord.
What Happens When the Lease Expires
At expiration, the building and all permanent improvements revert to the landlord. No payment changes hands. The legal term for this is the landlord’s reversionary interest, and it is baked into the ground lease from day one. The tenant’s leasehold interest merges with the landlord’s fee interest, and the landlord emerges as the unified owner of both the land and everything built on it.
The lease typically specifies the condition the building must be in at reversion. Most commercial ground leases require the tenant to deliver a functional, well-maintained structure, because a landlord doesn’t want to inherit a building that needs millions in deferred maintenance. Some agreements run the other way and require the tenant to demolish the building and return the land to its original condition, though that is uncommon in urban settings where the landlord stands to benefit from inheriting a developed property.
Subtenants face real exposure here. If a retail chain or office tenant has leased space inside the building, that sublease does not automatically survive the expiration of the ground lease. When the ground lease ends, so do any subleases derived from it, unless the landlord has separately agreed to honor them. Sophisticated subtenants negotiate recognition agreements directly with the landowner to protect against that outcome.
One practical consequence of the reversion is that tenants lose their incentive to invest in major capital improvements as the lease winds down. Every dollar spent on the building in the final years is a dollar the tenant will eventually hand to the landlord for free. Buildings on short-remaining-term ground leases tend to receive less maintenance, financing options narrow, and tenants start thinking about exit strategies well before expiration.
Ways the Split Can End Early
Many ground leases include a purchase option that lets the tenant buy the land at a predetermined price or at fair market value during specific windows. Retail chains frequently negotiate these clauses so they can convert a leasehold into full ownership if the location proves successful. When a tenant exercises a purchase option, the ground lease terminates and the tenant becomes the fee simple owner of the entire property, land and building together.
A right of first refusal works differently. Rather than letting the tenant buy at any time, it lets the tenant match a third-party offer if the landlord decides to sell. The landlord must notify the tenant of the proposed sale terms, and the tenant gets a window to match the price. If the tenant declines, the landlord can sell to the third party. If that sale falls through, the right typically resets.
A ground lease buyout, where the tenant or another investor purchases the landlord’s fee interest, can also happen by negotiation at any time. These transactions have become more common as the shrinking value of an aging leasehold pushes both parties toward consolidation.
A Note on Community Land Trusts
The same ownership split shows up in residential housing through community land trusts. A community land trust is a nonprofit that owns land and leases it to homeowners under long-term ground leases, typically 99 years. The homeowner buys the house but not the land under it and holds full title to the structure during the lease, just as a commercial ground tenant does.
The difference is a resale restriction. The ground lease caps how much the homeowner can sell the house for, using a formula designed to let the homeowner earn a fair return while keeping the home affordable for the next buyer. A common formula lets the homeowner keep their original purchase price plus a fixed percentage of any market appreciation, often around 25%. The community land trust retains a preemptive right to repurchase the home if the owner sells, which keeps the property in the affordable housing pipeline. Homeowners still have privacy, exclusive use, and the ability to pass the home to heirs. What they give up is the right to sell at any price the market will bear.