A ground lease is a long-term lease of land in which the tenant (the "ground lessee") constructs improvements on the leased land during the lease term. The land and buildings are owned by different parties — the land owner retains fee simple ownership of the land and collects ground rent, while the lessee builds on and operates the property for the duration of the lease. Ground leases are long-term instruments — typically 50–99 years — with periodic rent resets and reversion of improvements to the land owner at lease end.
Ground leases are particularly common in urban markets where land values are high relative to project feasibility. In Manhattan, Los Angeles, and other high-cost cities, separating the land from the building can allow a developer to reduce its upfront equity investment — leasing the land rather than buying it frees up capital for construction and other uses. The trade-off is ongoing ground rent obligations that reduce the project's NOI and impose a senior lien-like claim that must be serviced before any cash flows to the building owner or mortgage lender.
For building lenders, ground leases introduce complexity. The leasehold mortgage — a mortgage on the building owner's leasehold interest — is subordinate to the ground lease itself. If the ground lessee defaults on ground rent, the ground lessor can terminate the lease, wiping out the building lender's collateral entirely. Consequently, leasehold mortgage lenders require "non-disturbance" protections — agreements from the ground lessor to honor the leasehold mortgage even if the ground lease is terminated for lessee default.
Ground rent is typically structured as either fixed (a flat amount with periodic inflation adjustments) or variable (tied to the property's NOI or a percentage of revenue). Fair market rent resets — where the ground rent is periodically reset to reflect current market land values — create uncertainty for building owners and lenders, as higher rent resets can significantly impair the property's economics.
"Institutional" ground leases — characterized by long terms, fair market rent protections, building owner protections, and acceptable non-disturbance provisions — have gained favor among sophisticated investors. Organizations like iStar have developed platforms that acquire and originate ground leases as an investment strategy, capitalizing on the stable, bond-like income stream that ground rent provides.