Ground Leases

A ground lease is an agreement where the owner leases land to a tenant who is allowed to develop a piece of property during the lease period; at the end of the lease all improvements typically revert back to the land owner. This type of investment is a valuable addition to any portfolio, whether to serve as a hedge to other riskier investments or to simply give peace of mind that a stable reasonable return can be achieved over the holding period.

Some of the aspects of ground leases which make them attractive investments are:
  • Recognizable industry leading tenants
  • Long term leases, typically 10 - 20 years
  • Little to no management required of the landlord
  • Since the landlord retains full ownership of the land there is no gain recognition at the time of the lease, whereas there would be if the land had been sold to the ground lease user.
  • When the lease term expires, the land reverts back to the landlord to be leased again.
Cap rates on ground leases vary based on the quality of the underlying tenant, but they are generally on the lowest end of the investment spectrum, with tenants such as McDonalds, Chick-fil-A and Chase Bank commanding the lowest cap rates. Since cap rates are inversely related to price, lower cap rates generate the highest sales price.

Prior Ground Lease Sales Include
Ground Leases