Ground Lease
A lease where the tenant rents only the land and either owns or builds the improvements, typically for 50-99 years with the building reverting to the landowner at expiration.
A Ground Lease is a long-term lease agreement where the tenant rents the underlying land while owning (or constructing) the building and improvements. At lease expiration, the building typically reverts to the landowner. **Key Ground Lease Characteristics:** **Duration:** - Typically 50-99 years - Often structured as 20-25 year initial term plus options - Long duration allows tenant to amortize building investment **Ownership Structure:** - Landlord owns the land only - Tenant owns the building and improvements - Building reverts to landlord at lease end (in most cases) **Common Ground Lease Tenants:** - McDonald's (prefers ground leases) - Chick-fil-A - Major banks (Chase, Bank of America) - Large-format retail (Walmart, Target) **Investor Benefits:** 1. **Lowest cap rates**: Ground leases trade at 3.5-4.5% caps 2. **Zero structure risk**: No roof, HVAC, or building expenses 3. **Longest lease terms**: 50+ years of income security 4. **Residual value**: Building reverts at end of term **Investor Considerations:** 1. **Lower yield**: 150-200+ basis points below fee simple 2. **No depreciation**: Can't depreciate land 3. **Financing complexity**: Some lenders avoid ground leases 4. **Reversion uncertainty**: Building condition at end of term **Ground Lease vs. Fee Simple:** | Aspect | Ground Lease | Fee Simple | |--------|-------------|------------| | Cap Rate | 3.5-4.5% | 5.0-6.5% | | Ownership | Land only | Land + Building | | Structure Risk | None | Full | | Depreciation | No | Yes | | Loan Options | Limited | Full |
Frequently asked questions
What is a ground lease in real estate?
A ground lease is an arrangement where you own the land but the tenant owns the building. The tenant pays rent for use of the land, typically for 50-99 years. At lease expiration, the building usually reverts to the landowner.
Why do ground leases have lower cap rates?
Ground leases trade at lower cap rates (3.5-4.5%) because they eliminate all structure risk. Investors have zero building expenses—no roof, HVAC, or maintenance. The reduced risk commands premium pricing.
Can you get depreciation on a ground lease?
No. Since you only own the land and land cannot be depreciated for tax purposes, ground lease investors do not receive depreciation benefits. This is a key consideration for tax-sensitive investors.
Related: cap-rate, absolute-nnn-lease, fee-simple, noi