A ground lease is generally a long-term lease of land under which the landlord retains fee ownership of the land and the tenant develops or operates improvements on that land. In common commercial practice, the tenant bears most operating burdens, including taxes, insurance, maintenance, and development costs, often under a triple-net structure (NNN).
The tenant’s rights are contractual, not fee ownership. The tenant receives a long-duration right to possess, improve, finance, and use the property, subject to the lease’s use restrictions, rent provisions, default rules, and end-of-term provisions. That right is the tenant’s leasehold interest.
Tax ownership of improvements is not determined solely by title labels. The authorities emphasize who invested capital in the improvements and who retains the economic stake. Where a tenant constructs improvements on leased land and is not fully reimbursed, the tenant generally has a depreciable interest in those improvements.
Landowners use ground leases when they want to retain long-term ownership of strategically important land while generating recurring income and shifting development risk to the tenant. This can be attractive for families, trusts, institutions, nonprofits, and owners with long investment horizons.
Developers and operating businesses use them when they want site control without paying the full land purchase price upfront. That can preserve capital for construction, operations, and financing flexibility, even though the tenant still must budget for rent and other project costs, including legal and transaction fees.
In ground lease real estate, the appeal is often economic separation: one party wants stable land income and reversion value, while the other wants long-term control of a site for a building or business use.
The practical distinction in ground lease vs fee simple is that fee simple ownership means owning the land itself, along with the broad residual rights that come with title. By contrast, a ground lease gives the tenant a long-term contractual right to use and improve land it does not own.
That difference matters at the end of the term. A fee owner keeps the land indefinitely unless it is sold or encumbered. A ground tenant’s rights expire unless extended, renewed, or otherwise protected by contract. Sources discussing long-term leases note that tax law often respects even very long land leases as leases because land retains residual value.
For federal income tax purposes, rent paid under a true lease is generally treated as rent, while the tenant’s capitalized cost of acquiring a lease may be amortized under section 178 depending on the lease term and renewal expectations. Subsection 178(a) requires the lease term to include renewal options and expected renewal periods if less than 75 percent of acquisition cost is attributable to the remaining fixed term.
If the tenant constructs improvements, those costs are generally recovered through depreciation. A commercial building is generally nonresidential real property depreciated under section 168 using straight line over 39 years under GDS. On the other hand, the landlord does not have the right to depreciate the land, as land cannot be depreciated for tax purposes.
On lease termination, section 109 generally excludes from the lessor’s gross income the value of buildings or improvements made by the lessee, other than rent. If improvements are later sold or otherwise disposed of, ordinary recapture issues may arise, including Depreciation Recapture depending on the asset class and prior deductions.
What happens to the building sitting on the land when the ground lease expires?
Usually, the lease controls the outcome. Improvements may revert to the landlord, be purchased under a formula, or in some cases be removed. Many ground leases are drafted so the landlord receives the improvements when the term ends.
Can a tenant get a construction or permanent loan on land they do not own?
Yes. Ground leases are commonly structured to permit leasehold financing. The tenant can grant a mortgage on its leasehold rights, while the landlord separately finances its fee interest. Lenders usually require notice, cure, recognition, and replacement-lease protections.
What are the most important terms a tenant should negotiate before signing a ground lease?
Key terms include lease length, renewal rights, permitted use, rent escalations, financing rights, casualty and condemnation treatment, assignment rights, default cure periods, purchase options, and end-of-term treatment of improvements. Those provisions largely determine the project’s economic and tax profile.
How does being in a ground lease affect the property’s resale value?
Resale value often depends on remaining lease term, rent reset mechanics, financeability, transfer rights, and end-of-term economics. A well-structured lease can preserve value, but aggressive rent escalations or weak lender protections can materially reduce marketability and pricing.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Mike Reynolds, partner in charge of Bennett Thrasher’s Financial Reporting & Assurance practice, who has industry experience in Construction, or call us at 770.396.2200.
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