Ground Lease: Definition, Terms, How They Work
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Quick Facts — Ground Lease Lawyers
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What Is a Ground Lease?
A ground lease is an agreement that permits a tenant to develop a piece of property during the period of the lease. After the lease period, the land and all improvements the tenant makes return to the property owner. Ground leases may also be referred to as land leases since the landlord is leasing out only the land.
Ground leases should include the following essential aspects:
- Default conditions
- Fees
- Financing conditions
- Rights of the landlord
- Rights of the tenant
- Terms of the lease
- Title insurance
- Use provisions
How a Ground Lease Works
Ground leases involve leasing land for a long-term period to a tenant who then constructs a structure on that property. A typical ground lease covers a period from 50 to 99 years.
- Who owns the building
- Who owns the land
- Improvements to the property
A ground lease stipulates that the property owner will own any improvements unless the parties create an exception. This type of contract also stipulates that the tenant will pay relevant taxes during the period of the lease. Landlords may be able to sell the property on the land at a higher rate once the term of the lease expires because they can assume all improvements at that point.
Image via Unsplash by seanpollock
A landlord may choose to use a ground lease in order to:
- Avoid capital gains
- Generate revenue and income
- Retain property ownership for planning reasons
Ground leases are primarily used in commercial agreements. However, these types of leases are very different from other leases that you might find for office buildings and shopping complexes. Other commercial leases do not usually assign the lessee to take responsibility for the unit, charging tenants rent so they can operate their business instead.
When using a ground lease, however, a tenant will usually assume responsibility for any kind of expenses. Expenses that would be the responsibility of the tenant on a ground lease include:
- Construction
- Financing costs
- Improvements
- Insurance
- Renovations
- Repairs
- Taxes
Types of Ground Leases: Subordinated vs. Unsubordinated
You'll find two main kinds of ground leases: subordinated and unsubordinated. The difference between these two types deals with what happens if a tenant has financial difficulties during the term of the lease. Many times, tenants will take on debt to finance projects on the land they lease.
Subordinated Ground Lease
A landlord will agree to be a lower priority in terms of any other financing obtained on the property when signing a subordinated ground lease. If the tenant signs a subordinated ground lease on a plot of land, borrows money to build on that land, then defaults on the loan, the lender can go after the property (including the land itself) as collateral.
In other words, the landlord in a subordinated ground lease allows the property deed to act as collateral should the tenant default on a loan used to make improvements. The landlord can negotiate higher rent payments since they are taking on additional risk with subordinated leases. A landlord may also choose to create a subordinated ground lease since constructing the building on their land can increase the property's value.
Unsubordinated Ground Lease
A landlord who signs an unsubordinated ground lease retains top priority if there are claims on the property. This means that tenant's lenders cannot foreclose on the land if the tenant defaults on the loan. If the tenant defaults, the lender could go after the tenant's business assets . However, the lenders cannot gain full control of the property as they could do with a subordinated ground lease.
Because the lender cannot take ownership of the land in an unsubordinated ground lease should a tenant not pay their loan, prospective lenders may hesitate to extend a mortgage so a tenant can make improvements. As a result, landlords usually have to charge lower rent to the tenant.
Advantages of a Ground Lease
Ground leases can offer benefits to both landlords and tenants.
Landlords
Landlords can look forward to certain advantages when signing a ground lease, including:
- Steady income: While still retaining ownership of their property, a landlord can access a steady income stream. Ground leases usually also have an escalation clause. This clause guarantees rent increases as well as eviction rights, which offers protection if a tenant should default on rent or other types of expenses.
- Tax savings: If a landlord sells property outright to a tenant, they realize a gain on that sale. On the other hand, when they execute a ground lease, they don't need to report any gains. However, there still may be tax implications in regard to the rent they receive.
- Retain control: Some ground leases may include provisions that allow a landlord to keep a certain degree of control over their property. This can include how the property is developed and how it is used. In these cases, the landlord will be able to deny or approve changes to their land.
Tenants
Tenants enjoy a few advantages when signing a ground lease as well:
- Building in a prime location: Tenants gain the ability to build property in a prime location they might not otherwise be able to purchase. That's why you'll often find large chain stores utilizing ground leases in corporate expansion plans.
- No required down payment: As the tenant does not need to have a down payment to secure land (they would if they were purchasing the property), less equity is involved. This, in turn, frees cash for other uses. It also improves the yield on utilizing that land.
- Reduction to tax burden: As rents that are paid on a ground lease can be deductible for income taxes (both federal and state), the overall tax burden of the tenant is reduced.
Disadvantages of a Ground Lease
Certain disadvantages also exist for both landlords and tenants when choosing to use a ground lease.
Landlords
Landlords looking to execute a ground lease should be wary of potential drawbacks:
- Loss of control: If a landlord doesn't include the proper clauses and provisions in their lease, they can end up losing control of the property.
- Higher tax implications: This varies based on the location of the property, but a ground lease can come with higher tax implications for the landlord. Though landlords don't realize a gain from selling the property, the rent they charge is considered income. That means rent will be taxed at the ordinary rate, and this can increase the landlord's tax burden.
Tenants
Tenants also should be aware of drawbacks to a ground lease, including:
- Reduced flexibility: Tenants may encounter obstacles in using or developing the property if the landlord requires approval before they make any changes. A tenant may therefore experience more restrictions than they would if they had purchased the property.
- Higher costs: Costs that come along with the ground lease process may end up higher than the costs of just purchasing a property outright. A tenant should be prepared for various costs adding up, which can get expensive, especially when waiting for approval for certain projects. Costs can include improvements, permits, and taxes.
It's very important that both the landlord and tenant review the lease with expert support before they sign it. Working with an expert contract lawyer when creating a ground lease can ensure both parties are protected.
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Benjamin E.
Benjamin is an attorney specializing in Business, Intellectual Property, Employment and Real Estate.
"Benjamin E was very easy to work with and would recommend him."
Sarah S.
With 20 years of transactional law experience, I have represented corporate giants like AT&T and T-Mobile, as well as mid-size and small businesses across a wide spectrum of legal needs, including business purchase agreements, entity formation, employment matters, commercial and residential real estate transactions, partnership agreements, online business terms and policy drafting, and business and corporate compliance. Recognizing the complexities of the legal landscape, I am dedicated to providing accessible and transparent legal services by offering a flat fee structure, making high-quality legal representation available to all. My extensive knowledge and commitment to client success establishes me as a trusted advisor for businesses of all sizes.
"Sarah was extremely helpful in making me contracts that I needed for wholesaling real estate. Also gave me all the licenses I needed for my business and answered all my questions on information I was unsure of in the business. Will definitely only be going to Sarah for any of my legal needs."
Odini G.
I am an accomplished attorney with more than 19 years of experience and extensive expertise in business negotiations, commercial contracts, and technology transactions. With a proven track record of providing strategic legal advice and delivering exceptional results, I have successfully assisted numerous clients in drafting, reviewing, and negotiating various business arrangements. My experience encompasses a wide range of areas, including intellectual property, data privacy and security, SaaS agreements, and software licenses. I co-founded a reputable general corporate law firm with three offices in Aspen, Atlanta, and New York. As a partner and attorney, I represented diverse clients, including start-ups, public corporations, investors, financial institutions, educational institutions, and non-profit entities. With a focus on delivering comprehensive legal solutions, I provided general counsel, expert dispute resolution, efficient litigation management, and skillful contract drafting and negotiations for businesses across industries.
"Supremely responsive and works surprisingly quickly. Strongly recommend!"
Daehoon P.
Daehoon P.
Corporate, M&A & Securities Lawyer | Managing Attorney, DP Counsel PLLC Practice Areas: Business Formation | Commercial Contracts | Contract Drafting & Review | Mergers & Acquisitions | Venture Capital | Securities Offerings | Franchise Law | Employment & Equity Compensation | Intellectual Property | Cross-Border Transactions About/Bio: I represent companies, investors, and fund sponsors in corporate transactions, commercial contracting, and private securities matters, from entity formation and early-stage financings to acquisitions, exits, and ongoing strategic counsel. As Managing Attorney of DP Counsel PLLC, I help clients structure transactions clearly, allocate risk thoughtfully, and move deals forward with documentation that is practical, enforceable, and aligned with business objectives. My practice includes both day-to-day commercial matters and more complex transactional work, including venture financings, private offerings, M&A deals, fund-related documents, and cross-border structuring. What I Do: Corporate & Commercial • Entity formation and structuring for corporations, LLCs, and limited partnerships • Operating agreements, shareholder agreements, and governance documents • Commercial contract drafting, review, and negotiation • Vendor, distribution, manufacturing, SaaS, and licensing agreements • Employment, consulting, confidentiality, and equity compensation agreements • Outside general counsel support for growing companies Securities & Private Capital • Private offerings under Regulation D and Regulation S • Private placement memoranda, subscription agreements, and investor documents • SAFE, convertible note, and priced equity financings • Venture capital and private fund formation matters • Fund governing documents and offering document packages • Securities law analysis for private capital raising transactions Mergers & Acquisitions • Letters of intent and term sheets • Stock purchase, asset purchase, and merger agreements • Due diligence coordination and transaction support • Disclosure schedules, closing documents, and post-closing matters • Earnouts, rollover equity, indemnity structures, and related deal terms • HSR, CFIUS, and related regulatory issue spotting for qualifying transactions Digital Assets & Emerging Technologies • Federal-law digital asset and token securities analysis • Entity structuring for blockchain and Web3 ventures • Digital asset fund and operating structures • AML/KYC documentation support and regulatory issue spotting Franchising • Franchise Disclosure Documents (FDDs) • Franchise agreements • Master franchise and area development agreements • Franchise structuring and registration coordination Real Estate Transactions • Commercial real estate acquisitions and dispositions • Real estate joint ventures and syndications • Commercial lease drafting and negotiation • Real estate investment structures and related offering documents Cross-Border & International • U.S. market entry and entity structuring for international clients • Delaware and multi-entity holding structures • Cross-border transaction planning and documentation • Coordination with foreign counsel and tax advisors on cross-border matters Why Clients Hire Me: • Big-law-level drafting with boutique responsiveness • Practical, business-focused advice grounded in execution reality • Clear scoping and transparent fee arrangements • Experience across financings, acquisitions, fund formations, and cross-border transactions Typical Projects: • Contract drafting and negotiation • Entity formation and governance packages • Private offering document suites • Venture financing documentation • M&A transactions from LOI through closing • Fractional or outside general counsel support Industries Technology | SaaS | FinTech | Digital Assets | E-commerce | Healthcare | Real Estate | Food & Beverage | Professional Services
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Jane C.
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Brian R.
Brian M. Rokaw has negotiated, drafted, and reviewed a multitude of contracts, resolutions, and agreements for a wide array of business owners. Brian has represented clients who are starting a business, selling a business, buying a business, creating a partnership, establishing a corporate entity, as well as those that are dissolving a business throughout the State of Florida. Brian M. Rokaw is knowledgeable and experienced in all real estate related matters, both residential and commercial including closings, financing, and litigation. Brian has drafted hundreds of deeds, affidavits, bills of sale, and settlement statements. Brian has represented clients in all areas of the real estate industry, including buyers, sellers, developers, management companies, brokers, and investors throughout the State of Florida. Brian M. Rokaw has successfully defended against actions and negotiated settlement agreements involving all types of consumer debt. Brian has represented homeowners and commercial property owners that are facing foreclosure, being pursued by judgment creditors, consumers burdened by secured and unsecured financial obligations, as well as collection accounts throughout the State of Florida.
Daniel R.
NY Admitted Lawyer 20+ years of experience. Focused on Startups , Entrepreneurs, Entertainers, Producers, Athletes and SMB Companies. I have been a part of numerous startups as Founder, CEO, General Counsel and Deal Executive. I have been through the full life cycle from boot strap to seed investors to large funds-public companies to successful exit. Let me use my experiences help you as you grow your business through these various stages. We saw a market for an on-line platform dedicated to Virtual General Counsel Services to Start Ups and Private Companies.
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Browse Lawyers NowLawyer Reviews for Ground Lease Projects
Review Lease agreement of our land to solar pharm company
"Great job, Michael - thank you."
Review LOI for Commercial Ground Lease
"Darryl was awesome. He helped me to hone in on what was important in this effort. He is very personable, and patient, and ensures what is important to me gets addressed. Highly recommend."
Review McDonald's Ground Lease
"Thank you Scott for working on our ground lease."
Contracts
Ground Lease
New York
Can a ground lease be terminated early by the lessor if the lessee violates a non-monetary covenant?
I am currently in a ground lease agreement where I am the lessee, and I recently received a notice from the lessor stating that they intend to terminate the lease due to a violation of a non-monetary covenant. The specific covenant in question pertains to the maintenance and upkeep of the property. I have been diligently maintaining the property, but there may have been some minor lapses in the past. I would like to know if the lessor has the legal right to terminate the ground lease early based on a non-monetary covenant violation, and what options I have to defend against this termination.
Damien B.
Hello: The success of a claim of breach of the agreement depends on whether the alleged violation of the specific non-monetary covenant is material and whether there is a right to cure it. If it is a minor or curable breach, and the lessee can cure it, then the lessee may have defenses to an alleged breach claim.
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