In the world of commercial real estate, ownership is rarely black and white. One of the most nuanced and frequently misunderstood structures in the industry is the ground lease, an arrangement in which an investor or developer owns the improvements on a parcel of land while the land itself remains under the ownership of a separate party. From iconic urban skyscrapers to suburban retail centers, ground leases quietly underpin billions of dollars in commercial property across the United States. For investors and business owners exploring these opportunities, understanding how financing works in this context is absolutely essential before signing any agreements.
What Is a Ground Lease and How Does It Work?
A ground lease, sometimes called a land lease, is a long-term agreement in which a landowner leases the underlying land to a tenant, who then has the right to develop and use that land for the duration of the lease term. These leases typically run between 49 and 99 years, and in many cases, ownership of the improvements reverts to the landowner at expiration. The tenant, often referred to as the leasehold interest holder, owns the building or other structures built on the site but not the soil beneath them.
Ground leases are especially common in high-cost urban markets such as New York City, San Francisco, Honolulu, and Washington D.C., where landowners prefer to retain long-term appreciation of the land rather than sell outright. They are also prevalent on properties owned by universities, municipalities, religious institutions, and family trusts, which have strong reasons to hold land in perpetuity while still generating income from it. According to a 2024 report by the National Real Estate Investor, ground lease transactions in major U.S. metros have increased by approximately 18 percent over the past five years, driven in part by rising land values and the growing popularity of institutional ground lease platforms.
Ground leases are typically structured as either subordinated or unsubordinated. In a subordinated ground lease, the landowner agrees to allow their interest in the land to serve as collateral for the leasehold mortgage, which reduces risk for the lender but increases exposure for the landowner. In an unsubordinated ground lease, the landowner's interest is not pledged as collateral, making financing more challenging but far more common in practice. Most institutional landowners insist on unsubordinated terms, which is why lenders have developed specialized underwriting approaches to evaluate these transactions effectively.
The Financing Challenge: What Lenders Really Evaluate
Securing a loan on a ground leasehold interest is significantly more complex than financing fee-simple (full ownership) commercial real estate. Because the lender's collateral is limited to the leasehold estate rather than the land and building combined, the underwriting process involves a deeper review of the lease terms themselves. Lenders typically will not finance a leasehold interest unless several critical conditions are met.
"According to data from CBRE's 2024 U.S. Commercial Mortgage Market Report, lenders generally require a ground lease to have a remaining term of at least 20 to 30 years beyond the loan maturity date, meaning a 10-year loan may require 30 to 40 or more years remaining on the ground lease at closing."
Beyond lease term requirements, lenders scrutinize a number of additional factors when underwriting ground lease financing. Here are the key elements most commercial mortgage lenders will review:
- Remaining lease term: Most lenders require the lease to extend well beyond the loan maturity date, ensuring adequate time for the borrower to operate and exit the asset.
- Lender protection clauses: Strong leasehold financing requires provisions that give the lender notice of any default by the tenant, the right to cure such defaults, and the right to a new lease if the original is terminated.
- Rent escalation terms: Ground rent that escalates predictably, whether fixed, CPI-indexed, or appraisal-based, is viewed more favorably than structures with sudden, dramatic increases that could impair debt service coverage.
- Assignment and subletting rights: Lenders need assurance that the leasehold interest can be transferred to a new owner in the event of foreclosure, without requiring unreasonable landowner consent.
- Leasehold title insurance: A leasehold title policy is almost always required to protect both the borrower and the lender against title defects specific to the leasehold estate.
- Credit quality of the landowner: Institutional landowners such as universities, REITs, or municipalities are generally viewed more favorably than private individuals due to their stability and long-term commitment.
Loan-to-value ratios on ground lease transactions tend to be somewhat more conservative than on fee-simple properties, often ranging from 55 to 70 percent, depending on the lender type, property class, and the specific structure of the lease. Debt service coverage requirements may also be slightly more stringent, reflecting the additional complexity and risk layered into the collateral structure.
Loan Types Available for Ground Lease Properties
Despite the added complexity, several loan programs are available to borrowers seeking to finance leasehold interests in commercial properties. The right product depends on the property type, the borrower's goals, and the specific terms of the ground lease itself.
Conventional commercial mortgage lenders, including banks and credit unions, will consider ground lease financing on a case-by-case basis, with the strictest lease protection requirements. CMBS (commercial mortgage-backed securities) lenders have historically been active in this space, particularly for larger retail, office, and hospitality assets, though their appetite has shifted somewhat in the post-2022 interest rate environment. Life insurance companies remain among the most consistent sources of ground lease financing, especially for stabilized, institutional-quality properties with clean lease structures.
For smaller or more complex deals, private bridge lenders and debt funds have stepped in to fill gaps where conventional financing is unavailable, typically offering shorter-term loans at higher rates to allow borrowers time to stabilize the asset or improve lease terms before seeking permanent financing. SBA 7(a) and SBA 504 loans may also be available for owner-occupied commercial properties on ground-leased land, provided the lease term satisfies SBA guidelines, which generally require a lease extending at least 10 years beyond the loan maturity date, or through the loan term with renewal options that cover the gap.
Strategies for Borrowers Navigating Ground Lease Deals
For investors and business owners who encounter a ground lease opportunity, preparation and expertise are the keys to a successful financing outcome. Engaging an experienced commercial real estate attorney before executing any ground lease is a non-negotiable first step. The lease must be reviewed with an eye toward lender requirements, not just the tenant's operational needs, and any missing protections should be negotiated into the agreement upfront, since amending ground leases after execution can be difficult and costly.
Working with a knowledgeable commercial mortgage broker is equally important. Not all lenders are comfortable with leasehold financing, and identifying the right capital sources early in the process can save weeks of time and prevent unnecessary credit inquiries. A broker with experience in this niche can also help structure the loan request in a way that addresses lender concerns proactively, presenting the transaction with the documentation and analysis needed to build confidence in the deal.
Borrowers should also pay close attention to ground rent as a component of total occupancy cost. Unlike a fee-simple acquisition where the land cost is embedded in the purchase price and financed over time, ground lease rent is an ongoing cash obligation. This expense must be factored into the property's operating budget and clearly reflected in any debt service coverage analysis presented to lenders. In some cases, particularly with older leases written before modern escalation clauses became standard, ground rent may be surprisingly affordable, representing a real competitive advantage for the leasehold owner.
As the commercial real estate market continues to evolve in 2025, ground leases are increasingly being viewed not as a liability but as a creative capital-efficient structure that can allow developers and investors to control valuable assets with less upfront equity. Institutional platforms such as iStar (now Saul Centers) and Skyline Champion have helped legitimize the ground lease model for a new generation of investors, and as financing options continue to mature, we expect to see broader adoption of this structure across property types and markets throughout the country.
