Ground Lease Structure
How Ground Leases Work
In a ground lease arrangement, the landowner (fee holder) retains ownership of the land while granting the tenant (lessee) the right to use the land for an extended period. The tenant typically:
- Pays annual ground rent to the landowner (often with escalations over time)
- Builds, owns, and operates improvements on the land during the lease term
- Pays all property taxes, insurance, and operating expenses
- Can sell, finance, or sublease their leasehold interest (subject to lease terms)
- Surrenders improvements to landowner at lease expiration (unless extended)
Common Ground Lease Terms
49-99 years (99 years common)
Fixed increases, CPI adjustments, or resets
Often 1-3 renewal periods available
Some leases include land purchase rights
Benefits and Risks
Benefits
- +Lower acquisition cost than fee simple
- +Higher initial yield/cap rate
- +Less capital required
- +Ground rent may be tax-deductible
- +Potential appreciation during term
Risks
- -Reversion at lease expiration
- -Ground rent escalations reduce cash flow
- -Financing can be more difficult
- -Value declines as lease shortens
- -Less control than fee ownership
Ground Lease Valuation
Ground lease properties trade at discounts to fee simple value, with the discount increasing as the remaining lease term shortens. Key valuation factors include:
Valuation Considerations
- Remaining Lease Term: Longer terms = higher value. Properties with 50+ years remaining trade closer to fee value.
- Ground Rent Level: Below-market ground rent adds value; above-market rent reduces it.
- Escalation Structure: Fixed escalations are preferable to unpredictable resets.
- Extension Options: Renewal rights at reasonable terms add significant value.
- Purchase Option: Right to buy the land eliminates reversion risk.
Rule of Thumb: Ground lease properties typically trade at 85-95% of fee value with 75+ years remaining, 70-85% with 50-75 years, and 50-70% with 30-50 years. Properties with less than 30 years remaining become increasingly difficult to finance and sell.
Ground Leases in NYC
New York City has a significant number of ground lease properties, particularly in Manhattan. Many were created decades ago by institutional landowners, churches, universities, and families seeking to retain land ownership while monetizing through development.
Skyline Properties has extensive experience with ground lease transactions in Manhattan. Robert Khodadadian has closed numerous ground lease sales including the $65M sale of 236 Fifth Avenue, a prominent NoMad property on a ground lease.
Frequently Asked Questions
Can I get financing on a ground lease property?
Yes, but lenders typically require the remaining lease term to exceed the loan term by 10-20 years (called a "tail"). Most lenders want at least 30-40 years remaining. Shorter-term leases may require cash purchases or seller financing. Ground lease properties often have lower LTV limits than fee simple.
What happens if I can't extend the ground lease?
If the lease expires without extension, the landowner typically takes ownership of all improvements (buildings) on the property. This is called "reversion." As an investor, your improvements become worthless at expiration. This is why remaining lease term is critical to value and financing.
Are ground leases a good investment?
Ground leases can be excellent investments for the right buyer. They offer higher initial yields, lower capital requirements, and potential appreciation during the lease term. However, they require careful analysis of lease terms, remaining duration, and exit strategy. They're best suited for investors who understand the structure and plan accordingly.
How is ground rent determined?
Initial ground rent is typically set as a percentage (4-6%) of land value at lease commencement. Subsequent escalations may be fixed (e.g., 3% annual), tied to CPI, or based on fair market value resets at specified intervals. Understanding the escalation structure is crucial for underwriting.