Ground Lease vs. Fee Simple Ownership

Identify the estate before comparing the price

A leased property purchase may include the land and building, subject to the existing tenant lease. A ground lessor investment typically offers the landowner's rent stream and rights under a ground lease. A leasehold acquisition offers the tenant's remaining contractual rights, not ownership of the underlying land. Have counsel confirm the interest using the title documents and lease.

Landowner versus leasehold buyer: different cash flows

The ground lessor receives contractual ground rent, subject to the lease and tenant performance. The leasehold investor may receive building or subtenant income but must pay ground rent and comply with ground lease obligations. Comparing gross receipts from these two positions can misstate the economics. Build a cash-flow schedule that shows which rent is received and which rent must be paid.

Who owns the building and what happens at expiration?

Ownership and control of improvements depend on the documents. A tenant may build or control improvements during the term; the lease governs surrender, removal or reversion at expiration. Do not assume the landlord receives a usable building in a particular condition or that a leasehold buyer can extend indefinitely. Review restoration duties, renewal rights and notice requirements.

Ground rent resets can change the investment

Scheduled increases and market-based resets have different effects. A fixed increase is easier to schedule; a reset may depend on an appraisal process or a defined land value. For a leasehold buyer, higher ground rent can reduce the cash available after expenses. For the lessor, fixed rent may lag changing conditions. Read the formula, dispute mechanism and timing instead of forecasting an unsupported future rent.

Financing and exit questions

Present the full ground lease to a prospective lender early. Ask how remaining term, extension rights, assignment consent and lender protections affect financing. The landowner's mortgage and the tenant's leasehold financing are different obligations. Counsel should examine subordination, default notices and cure rights. Do not assume a quoted loan for a conventional fee-owned property applies to the leasehold.

A practical comparison before making an offer

Create separate columns for the estate acquired, assets included, rent received, rent paid, owner expenses, remaining term and end-of-term rights. Underwrite each column independently before comparing cap rates. A lower asking price for a leasehold may reflect a shorter-lived interest; it does not establish a bargain. Tax basis and depreciation also depend on what you actually acquire, so confirm those separately with your tax adviser.

Sources and related research

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