Question 1

How is a ground lease structured?

Accepted Answer

A ground lease is structured with: the land lease (the core agreement leasing the bare land), improvement provisions (the tenant's right and obligation to construct improvements), rent provisions (base ground rent, escalations, percentage rent if applicable), financing provisions (the tenant's right to obtain a leasehold mortgage and the lender's protections), casualty and condemnation provisions (how insurance proceeds and condemnation awards are divided), maintenance and repair obligations, default and termination provisions (with adequate cure periods for the tenant and lender), reversion provisions (what happens to improvements at lease expiration), and subordination, non-disturbance, and attornment agreements (SNDA).

Question 2

What protections does a ground lease tenant need?

Accepted Answer

Essential tenant protections: a long enough term to amortize the investment in improvements (typically 50+ years), the right to obtain leasehold financing (with lender-friendly lease provisions), non-disturbance from the landowner (the lease cannot be terminated as long as the tenant performs), assignability (the right to transfer the lease to a buyer), subletting rights (the right to sublet portions of the improvements), cure periods for defaults (adequate time to remedy any lease violation), the right to rebuild after casualty (insurance proceeds used for reconstruction), and a purchase option or right of first refusal (if negotiable).

Question 3

What are the risks of a ground lease structure?

Accepted Answer

Risks include: lease expiration (the tenant loses the improvements unless a renewal or purchase is negotiated), rising ground rent (if escalation provisions are aggressive), financing difficulty (leasehold mortgages are more expensive and harder to obtain), limited control over the land (the landowner retains fee ownership), subordination issues (conflicts between the ground lease and leasehold mortgage), tenant default (the landowner may terminate the lease and take the improvements), and appraisal challenges (ground lease properties can be difficult to value and may trade at a discount to fee simple properties).

Ground Lease: Structure

Ground Lease Structure

Core Components

Tenant Protections

Risks

Related Terms

Barnes Walker Commercial Real Estate

Ready to Get Started?