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A ground lease is a long-term agreement where a landowner rents the land itself to a tenant, who then has the right to construct and own buildings on that land during the lease period. When the lease expires, ownership of the improvements typically transfers to the landowner. The tenant pays rent on the land but owns everything built on it.
Holland & Knight, a law firm specializing in real estate transactions, notes that ground leases typically run between 50 and 99 years, long enough for tenants to recoup the cost of construction. They are structured as triple net leases, meaning tenants pay property taxes, insurance, and maintenance in addition to rent.
In a standard commercial lease, you rent both the building and the land. The landlord owns everything and you occupy it. In a ground lease, you rent only the dirt. You build your own building, own it during the lease, and pay rent to the landowner below you.
Think of it like renting the plot in a trailer park: you own your home on the land, but you pay monthly rent for the ground it sits on.
This structure allows tenants to access prime locations without the capital outlay of buying the land. McDonald's and Macy's both operate many locations on ground-leased land. American Tower, which owns approximately 42,000 cell tower sites, holds about 90% of those sites under ground leases rather than through outright land ownership.
Ground leases divide into two structural categories based on what happens if the tenant encounters financial difficulty.
Ground leases serve landowners well in several situations. A church, university, or family trust that cannot legally sell the land, or does not want to, can still generate income through long-term lease payments. Avoiding a sale also means avoiding the recognition of capital gains on appreciated land.
USQ, a ground lease investment platform, highlights the escalation clauses built into most ground leases. These allow the landlord to increase rent periodically, keeping income in line with inflation and property value appreciation over the lease's multi-decade term.
At lease expiration, the landowner also receives a functioning building, which typically enhances the land's value beyond what it carried before development.
For the tenant, the appeal is capital efficiency. Acquiring a prime urban site often costs tens of millions of dollars. A ground lease allows you to develop and operate on that land by paying rent instead. You preserve capital for the building itself, the business, or other investments.
The National Association of Realtors notes that ground leases are sometimes the only way to access extremely valuable locations, particularly in cities like New York where major landowners are institutions prohibited from selling.
The Motley Fool notes that ground lease terms for companies like American Tower typically include renewal options, which is why American Tower systematically renews or buys out its ground leases rather than letting them expire.
Ground leases have a built-in structural risk that worsens over time. As the remaining lease term shortens below 30 to 40 years, lenders become reluctant to finance the leasehold interest. Buyers discount the value heavily because they know the building reverts to the landowner at expiration.
Modern ground leases address this by including evergreen extension options that allow the tenant to reset the remaining term periodically. USQ's ground lease structure allows partners to continuously reset to a 99-year term, preventing the value erosion that affects traditional non-extensible leases.
With deep roots in traditional finance and the digital asset industry, Acquire.Fi operates as a specialist M&A advisory firm. Coverage spans M&A, secondaries, OTC, and capital markets advisory across digital assets and frontier tech. Our team has decades of combined experience across every stage of the deal lifecycle.
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