Ground Lease vs. Land Lease: Are They Different?

Ground and land leases may carry different meanings depending on the region, but they’re better understood as synonyms rather than distinct lease options. These long-term agreements are especially popular in high-demand locations where commercial real estate prices are steep, though they can also have residential applications, such as in mobile home communities. 

Before you commit to a ground or land lease, let’s explore how they work and a few notable distinctions to be aware of. 

Ground lease vs. land lease: Key differences

These terms are often used interchangeably and essentially mean the same thing: a tenant has the right to use the land as outlined in the lease agreement with the landowner. While there isn’t a significant difference between a ground lease and a land lease, they may pose different conditions for tenants, such as: 

• Development rights: A ground lease defines a tenant’s development rights, while land leases may not. 
• Duration and purpose: Both lease types are usually long-term, ranging from 50 to 99 years, and used for commercial purposes. However, certain land lease agreements might only last for a few years, depending on the intended use of the land. 
• Transfer of ownership: In ground leases, the tenants own any property they add to the land but transfer ownership to the landowner upon expiration, whereas land leases don’t typically involve significant development. 

Rather than thinking of these leases as different options in real estate, it’s better to consider the terms of the agreement and the intended use of the land. While a land lease can mean tenants only have a right to the land itself, this isn’t its exclusive definition, and some agreements may allow tenants to build new property. 

What is a ground lease?

A ground lease is a long-term agreement in which a landowner rents their land to a tenant. The tenant often builds property on the land for business use and, in turn, pays rent to the landowner over a specified period. Once the lease expires, the tenant usually transfers any additions to the land (also known as improvements) back to the owner. Here are the specifics of how they work. 

Lease period duration

A ground lease only makes sense if it allows the tenant to recoup their investment, so it’s common to see long-term agreements lasting from 20 to 40 years. However, the maximum duration is technically 99 years, with many agreements valid for at least 50. Ground leases can also include options for renewal, which helps incentivize tenants to continue investing in and maintaining the property. 

Lease types

For tenants who take out loans to pay for development costs, ground leases can be categorized into two main types: subordinated and unsubordinated ground leases. In a subordinated ground lease, the landowner agrees to transfer their rights to the property to the tenant's financial lender. Key characteristics include: 

• Higher financial risks: Since the lender has priority, the landowner faces the risk of losing their land to the lender if the tenant defaults. 
• Attractive financing terms: Subordinated leases can make it easier for tenants to secure better interest rates and loan terms.
• Incentives for development: Because this lease type usually offers better financing opportunities, tenants might be willing to invest more to develop the land. Also, landowners may be able to negotiate higher rent payments. 

Conversely, unsubordinated ground leases put the landowner’s interest first, even above the claims of any lenders. Here’s what you should know about this lease type: 

• Stability and security: Unsubordinated leases offer greater stability for landowners, making them the more common choice for most lease agreements. 
• Less favorable financing opportunities: Tenants may not find as many competitive financial lenders since the landowner has the highest priority over the property. 
• Lower rent costs: Landowners typically lower the rent for tenants who accept an unsubordinated ground lease to counter the incentives offered by subordinated leases. 

Ultimately, choosing between a subordinated and unsubordinated ground lease depends on the priorities and risk tolerance of the tenant and landowner. 

Potential uses

A ground lease can theoretically apply to any long-term real estate or business venture in areas with limited development space. Potential uses include: 

• Commercial development: Projects such as office buildings, shopping centers, and hotels. 
• Industrial facilities: Manufacturing plants, warehouses, and distribution centers that require significant space and infrastructure investments. 
• Residential projects: Apartment complexes, condominiums, and mixed-use properties, especially in popular urban areas with high real estate costs. 
• Public infrastructure: Municipalities and essential services may use ground leases for infrastructure projects such as schools, hospitals, solar farms, or cellular towers. 

With their versatility and lower upfront costs, ground leases can be a strategic way to maximize land use and development opportunities, particularly for businesses in high-cost areas.  

Development rights

Ground leases typically give tenants significant development rights, including the ability to construct buildings and other permanent structures. They often have flexibility in the design and usage of the improvements, which can include everything from the architectural style of buildings to the specific commercial or residential purposes of the property. Still, the landowner may want to include requirements for the type and scope of any developments. 

Throughout the lease term, tenants retain ownership over any improvements they make on the land. This means tenants are also responsible for ensuring their property complies with local zoning laws, building codes, and other regulatory requirements. Once the ground lease expires, however, ownership typically reverts to the landowner unless stated otherwise in the lease agreement. It’s then at the owner’s discretion to do with the property as they wish. 

Financial structure

Ground leases can involve one or several financial arrangements, but it’s most common for landowners and tenants to set a fixed rental rate. In some cases, the rent may also factor in external market changes or how much revenue the tenant generates from the property. 

For instance, some landowners require periodic adjustments to account for inflation, local demand growth, and increases in the value of their land. Additionally, lease agreements usually hold the tenant responsible for paying property taxes and insurance, not to mention ongoing property maintenance and repairs. 

Termination conditions

Structures built by the tenant generally become the property of the landowner upon termination of the lease. However, some agreements may include specific clauses that offer alternatives to this default arrangement, such as: 

• Buyback options: With some ground leases, tenants have the option to purchase the improvements they have made. This allows them to retain ownership of their developments or sell them to a third party, which helps recover some of the investment at the lease’s end. 
• Structure removal: Another possible arrangement is for tenants to remove any structures they have built, ensuring the landowner regains possession of the land in its original condition. This option is typically specified in cases where the landowner doesn’t want the responsibility or liability associated with the improvements. 

Negotiations ultimately decide the specifics of what happens to the property at the end of a lease term. Ideally, both parties can agree on fair terms, including potential compensation for the tenant for any remaining value of the improvements. 

How to decide if a ground lease is right for you

Now that we’ve established how a ground lease typically works, you can follow these steps to determine if it’s the right option for your real estate or business goals: 

1. Define your business objectives

Before entering into a ground lease, clearly outline your business plans and objectives. Ground leases are ideal for substantial projects where purchasing the land isn’t viable, but you might not need one if you can buy the land outright. You should also think about your plans to build permanent structures (if any) and whether the piece of land supports your immediate and future needs. 

2. Think about financial considerations

Similar to other large purchases or investments, it’s always wise to evaluate your budget before taking on any new financial obligations. Ground leases often require a significant initial investment for construction and pose long-term financial commitments. Be prepared to allocate funds for building and maintaining your business' structures, not to mention any sudden expenses that arise without warning. 

You should also consider the potential return on investment (ROI) from the improvements made to the land. Ground leases may increase the land’s value through new development, but they also come with financial risks and obligations. Carefully assess the complete financial picture and ensure the ground lease aligns with your expectations.

3. Evaluate the need for development

In addition to determining the types of structures to develop and the estimated building costs, consider whether the land needs additional improvements. Ground leases are more suitable for projects involving significant construction, but you don’t want to go overboard for something that you won’t own at the end of the lease. In short, you want to ensure the ground lease offers the framework to support your development needs in a way that also makes sense for the business. 

4. Estimate necessary lease duration

Ground leases often last for decades to allow tenants to recoup some, if not all, of their investment. Consider the nature and timeline of your project to determine the appropriate lease length. A longer ground lease makes more sense if your business plans involve a long-term commitment to the land, such as constructing and operating an apartment complex. Conversely, if your requirements are for a shorter-term or seasonal project, it may be worth exploring different options that match your time frame. 

5. Research legal requirements

It’s always a good idea to research the legal requirements and rules associated with the leased land, which can vary depending on your area. Start by checking local zoning laws and determine if your development plans are permitted. In addition, review potential lease agreements for any restrictive clauses or obligations that might affect how you can use the land. 

For example, you want to look for restrictions on selling your leasehold interests, conditions on removing structures at the end of the lease, and any other specific legal obligations. This step is particularly important to avoid disputes and confirm you can move forward with future projects. 

6. Consult the professionals

To take it a step further, consider working with legal, financial, or real estate professionals specializing in ground leases. Perhaps the easiest way to get professional advice is to start with LegalZoom, as our network of attorneys can help you navigate the legal requirements, review and revise lease agreements, and ensure that your interests and rights are protected. 

Above all else, you want to protect the future of your investment. Professionals know best, so you should strongly consider seeking their advice before making any significant financial or business decision—especially regarding long-term lease agreements. 

7. Gauge the market

While it’s impossible to predict how the market will behave in the future with complete certainty, you want to do your due diligence and gauge the current and projected trends. Pay attention to current and upcoming developments as they arise, considering anything that may impact the value of your planned use of the leased land. 

For instance, monitor factors such as local real estate value trends, economic forecasts, and demographic shifts. You should also investigate any major infrastructure projects or developments planned for the area, as these can significantly affect the success of your plans. 

8. Perform a risk assessment

Finally, after all your research, consideration, and planning, ask yourself: are the potential benefits of the ground lease process worth the risks? As you can see, ground leases can offer substantial advantages but also come with their share of challenges. If the answer still isn’t clear, it might be time to consult a financial advisor or real estate attorney to help you sort through the complexities. 

While you can find these professionals on your own, you can also partner with services like LegalZoom to match with the right legal expert for your needs. By doing so, you can ensure that your investment is sound and you’re well-prepared to face any potential challenges.

FAQs

For more information about leasing land, here are some common questions other readers have: 

What are the financial benefits of a land lease?

A land lease allows tenants to use valuable land without purchasing it. For landowners, it provides steady income and retains ownership of the land, which can appreciate in value over time. 

Is a ground lease or land lease better for landowners?

A ground lease often benefits landowners more as it allows them to keep their land while earning revenue from improvements made by the tenant. However, ground and land leases can technically mean the same thing, so the best outcome for landowners depends on the specific financial and strategic goals. 

Do you need a lawyer to create a commercial lease?

Not everyone may need a lawyer, but consulting one is the safer option for most when creating commercial leases. A lawyer ensures the lease complies with local laws, protects your interests, and addresses all necessary legal and financial considerations. 

What are the liabilities of a ground lease?

Ground lease liabilities include the tenant’s responsibility for property taxes, maintenance, insurance, and development costs. Additionally, tenants risk losing their investment in improvements if the lease isn’t renewed or if they default on the lease terms. 

Is a ground lease the same as a land lease? 

Ground leases generally allow a tenant to develop and construct permanent structures, but leases may or may not include the same rights. Land leases can also describe certain agreements more accurately, but what matters most is the content of the lease agreement, which outlines the rights of the both parties.