A lease structure where a real estate investor rents the land (i.e. ground) only. In the case of a ground lease, generally one party owns the land (i.e. fee simple interest) while a separate party owns the improvements (i.e. leasehold interest). In most cases, the owner of the land leases the land to the owner of the improvements for an extended period of time (20 – 100 years).
When the ground lease predates a mortgage on the leasehold interest, the ground lease generally has priority over that mortgage unless the ground lease is expressly subordinated to the mortgage. Thus, a ground lease is often thought of and valued as a form of financing.
The ground lease is a common vehicle used by generational families to generate cash flow from well-located parcels of land without having to operate the property nor give up ownership in the property. For instance, the Martinez family owns a 10 acre parcel at the corner of main and main. They lease the parcel for $100,000 per year to Jennifer’s Bakery for 50 years, who in turn builds a bakery on the property. Jennifer’s Bakery operates a bakery on the property for the next 50 years and at the end of the ground lease term, returns the land together with any improvements on the land to the Martinez Family.