What is a 'Ground Lease'

A ground lease is an agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner. A ground lease indicates that the improvements will be owned by the property owner unless an exception is created and stipulates that all relevant taxes incurred during the lease period will be paid by the tenant. Because a ground lease allows the landlord to assume all improvements once the lease term expires, the landlord may sell the property at a higher rate.

BREAKING DOWN 'Ground Lease'

A ground lease involves leasing land, typically for 50 to 99 years, to a tenant who constructs a building on the property. The ground lease defines who owns the land and who owns the building and improvements on the property.

Subordinated and Unsubordinated Ground Leases

Ground lease tenants often finance improvements by taking on debt. In a subordinated ground lease, the landlord agrees to a lower priority of claims on the property in case the tenant defaults on the loan for improvements. In other words, the landlord in a subordinated ground lease essentially allows for the property deed to act as collateral in the case of tenant default on any improvement-related loan. For this type of ground lease, the landlord may negotiate higher rent payments in return for the risk taken on in case of tenant default. This may also benefit the landlord because constructing a building on his land increases the value of his property.

In contrast, an unsubordinated ground lease lets the landlord retain top priority of claims on the property in case the tenant defaults on the loan for improvements. Because the lender may not take ownership of the land if the loan goes unpaid, loan professionals may be hesitant to extend a mortgage for improvements. Although the landlord retains ownership of the property, he typically has to charge the tenant a lower amount of rent.

Benefits of a Ground Lease

A ground lease lets a tenant build on property in a prime location that he could not purchase. For this reason, large chain stores such as Whole Foods and Starbucks often utilize ground leases in their corporate expansion plans.

A ground lease also does not require the tenant to have a down payment for securing the land, as purchasing the property would require. Therefore, less equity is involved in acquiring a ground lease, which frees up cash for other purposes and improves the yield on utilizing the land.

In addition, the landowner gains a steady stream of income from the tenant while retaining ownership of the property. A ground lease typically contains an escalation clause that guarantees increases in rent and eviction rights that provide protection in case of default on rent or other expenses.

Example of a Ground Lease

In July 2016, AllianceBernstein, an investment firm based in New York, purchased a 99-year ground lease from BLDG Management for New York City's George Washington Hotel in a deal worth $100.4 million. BLDG originally purchased the hotel when it was in foreclosure in 1994. Although the building was most recently used by the Manhattan-based School of Visual Arts as a student dormitory, BLDG filed plans in April 2016 to restore the property to a hotel with a restaurant, bar and ground-level stores.

  1. Gross Lease

    A type of commercial lease where the landlord pays for the building's ...
  2. Triple Net Lease

    A triple net lease assigns sole responsibility to the tenant ...
  3. Lease Payments

    Lease payments are tied to the terms of different forms of leasing ...
  4. Graduated Lease

    A type of long-term, typically for commercial property, lease ...
  5. Lease Utilization

    A financial ratio that measures how much a company uses leasing ...
  6. Sublease

    A sublease is the renting of property by a tenant to a third ...
Related Articles
  1. Managing Wealth

    11 Mistakes Inexperienced Landlords Make

    Avoid these pitfalls if you considering purchasing a rental property.
  2. Investing

    5 Tips For First-Time Renters

    Knowing the main points of a lease will make sure you don't sign - and end up paying for - something you don't want.
  3. Personal Finance

    Is There a Way to Get Out of Your Car Lease Early?

    For those who no longer want their car for whatever reason, transferring the lease to an interested party can be a particularly appealing choice.
  4. Investing

    Top 4 Nightmares For Real Estate Investors

    Renting out your property is not without risks; the good news is, they don't have to keep you up at night.
  5. Managing Wealth

    Why You Should Buy A Car Instead Of Leasing

    While leasing has certain advantages, buying a car tends to save you money in the long run and offers greater flexibility.
  6. Personal Finance

    Make the Right Choice: Buying or Leasing a Car

    Ask yourself these questions before deciding between leasing or buying a car.
  1. What are the differences between single, double and triple net leases?

    Learn the ins and outs of net lease agreements, including the key differences between single net, double net and triple net ... Read Answer >>
  2. What are the three "nets" of an NNN lease?

    Learn what the three "nets" are in an NNN lease and how they affect the responsibilities of both landlord and tenant in a ... Read Answer >>
  3. What kinds of real estate transactions use triple net (NNN) leases?

    Learn how a net-net-net or triple net lease works and why it is popular in commercial real estate transactions. It is also ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center