A ground lease is a long-term lease (typically 50-99 years) of land only — the tenant constructs and owns the improvements (building) during the lease term. At lease expiration, improvements revert to the land owner. Ground leases separate land and building ownership, enabling developers and businesses to acquire use of prime real estate without purchasing the land. The IRS and SBA both address leasehold financing. See irs.gov/publications/p946 for depreciation of leasehold improvements and sba.gov for SBA leasehold collateral rules.
A ground lease — also called a 'land lease' — is a long-term lease agreement in which the landowner (the 'fee owner' or 'lessor') leases raw land to a tenant (the 'lessee'), who then constructs improvements (a building, parking structure, retail center) on the land at the tenant's expense. The tenant owns the improvements during the lease term but does not own the land. At expiration, the improvements typically revert to the landowner. Why ground leases exist: Land-owning institutions (universities, hospitals, religious institutions, pension funds, municipal governments) often cannot or will not sell land — either for legal, mission, or perpetual-ownership reasons. Ground leases allow these institutions to derive income from their land holdings while retaining ownership. Developers benefit by deploying capital into the building (which generates income) rather than land (which does not), improving returns on equity. Key ground lease terms: - Term: 50-99 years, with renewal options. Terms shorter than 30 years are difficult to finance because leasehold mortgage lenders require sufficient remaining term to amortize debt. - Ground rent: Fixed or escalating rent payments to the landowner. Common structures: fixed rent with CPI adjustments; periodic resets to fair market value (which can create revaluation risk for lessees). - Subordinated vs. unsubordinated: In a subordinated ground lease, the land owner agrees to subordinate their fee interest to the tenant's mortgage — allowing a lender to foreclose on both the leasehold and land. In an unsubordinated ground lease, the land owner retains senior position, limiting the lessee's ability to finance the improvements. Subordinated ground leases are lender-preferred. - Reversion at expiration: The landowner receives the improvements at expiration — creating potentially large value transfer. Lessees with short remaining terms face a depreciating asset. Leasehold mortgage financing: Lenders finance improvements on ground-leased land through 'leasehold mortgages' — the collateral is the tenant's leasehold interest in the land plus the owned improvements. Most lenders require: remaining lease term ≥ loan term + 10 years; subordinated ground lease (or at minimum, non-disturbance provisions); and the landlord's agreement to provide the lender with cure rights if the tenant defaults on ground rent. SBA lenders can accept leasehold interests as collateral under SBA SOP 50 10 guidelines when the leasehold meets minimum term and subordination requirements. See sba.gov for SBA leasehold collateral policy. IRS depreciation: Leasehold improvements constructed on ground-leased land are depreciated over the lesser of the lease term (including renewal options likely to be exercised) or the asset's useful life, per IRC Section 168 and IRS Publication 946 (irs.gov/publications/p946). For long ground leases (50+ years), improvements are typically depreciated over their standard MACRS life.
The tenant (lessee) owns the building improvements during the ground lease term. The landowner (lessor) owns only the land. At the end of the ground lease term, the improvements typically revert to the landowner — the lease determines whether the tenant receives any compensation for the reversion value. This reversion is a critical negotiating point; tenants prefer provisions entitling them to compensation for remaining improvement value at lease expiration or renewal.
In a subordinated ground lease, the landowner agrees to subordinate their fee interest to the tenant's leasehold mortgage — enabling the lender to foreclose on both the leasehold and the land if the tenant defaults. This is lender-preferred because it gives the lender better security. In an unsubordinated ground lease, the land owner retains senior position. Most institutional lenders will not provide a leasehold mortgage on an unsubordinated ground lease without non-disturbance and cure-right provisions from the landowner.
Yes, subject to SBA collateral requirements. SBA lenders can accept leasehold interests as collateral when the remaining lease term (including options likely to be exercised) is at least equal to the loan term plus 10 years, the ground lease is subordinated or the landowner provides a lender protection agreement, and the lender has cure rights to prevent ground lease termination if the tenant defaults on ground rent. Consult SBA SOP 50 10 at sba.gov for current standards. Apply at ClearValue Lending to explore SBA options for leasehold properties.