Ground Lease Structure
Explore Ground Lease Opportunities
Skyline Properties brokers ground lease transactions across NYC, including the $65M deal at 236 Fifth Avenue.
How Ground Leases Work
The landowner (fee holder) keeps the land and gives the tenant (lessee) the right to use it for a long, fixed term. The tenant typically:
- Pays annual ground rent to the landowner (often with escalations over time)
- Builds, owns, and operates improvements on the land during the lease term
- Pays all property taxes, insurance, and operating expenses
- Can sell, finance, or sublease their leasehold interest (subject to lease terms)
- Surrenders improvements to landowner at lease expiration (unless extended)
Common Ground Lease Terms
49-99 years (99 years common)
Fixed increases, CPI adjustments, or resets
Often 1-3 renewal periods available
Some leases include land purchase rights
Benefits and Risks
Benefits
- +Lower acquisition cost than fee simple
- +Higher initial yield/cap rate
- +Less capital required
- +Ground rent may be tax-deductible
- +Potential appreciation during term
Risks
- -Reversion at lease expiration
- -Ground rent escalations reduce cash flow
- -Financing can be more difficult
- -Value declines as lease shortens
- -Less control than fee ownership
Ground Lease Valuation
Ground lease properties trade at a discount to fee simple value, and the discount widens as the remaining term gets shorter. What drives the number:
Valuation Considerations
- Remaining Lease Term: Longer terms = higher value. Properties with 50+ years remaining trade closer to fee value.
- Ground Rent Level: Below-market ground rent adds value; above-market rent reduces it.
- Escalation Structure: Fixed escalations are preferable to unpredictable resets.
- Extension Options: Renewal rights at reasonable terms add significant value.
- Purchase Option: Right to buy the land eliminates reversion risk.
Rule of Thumb: Ground lease properties typically trade at 85-95% of fee value with 75+ years remaining, 70-85% with 50-75 years, and 50-70% with 30-50 years. Properties with less than 30 years remaining become increasingly difficult to finance and sell.
Ground Leases in NYC
New York City has a large stock of ground lease properties, most of them in Manhattan. Many were set up decades ago by churches, universities, other institutions, and families that wanted to keep the land and still earn from development on it.
Notable NYC Ground Lease Landowners
- Columbia University (Morningside Heights, parts of Midtown)
- Trinity Church (Lower Manhattan)
- The Durst Organization (Times Square, Midtown)
- Astor family interests (various Manhattan locations)
- Various family trusts and institutions
Skyline Properties has worked on ground lease transactions in Manhattan for years. Robert Khodadadian has closed numerous ground lease sales, including the $65M sale of 236 Fifth Avenue, a prominent NoMad property on a ground lease.
Frequently Asked Questions
Why would someone buy a ground lease property?
Ground lease properties usually trade below fee simple value, so the buyer starts at a higher initial yield. They suit investors who want steady cash flow, especially when the lease has many years left to run. Ground lease financing may also take less equity.
What happens when a ground lease expires?
When a ground lease expires, the buildings and improvements typically revert to the landowner (fee holder). The tenant/lessee loses its investment unless the lease is extended or it negotiates a buyout of the land. This "reversion" is the central risk of owning a leasehold.
Can I get financing on a ground lease property?
Yes, but lenders typically want the remaining lease term to run 10-20 years past the loan term (the "tail"). Most want at least 30-40 years left. On a shorter lease you may need to pay cash or get seller financing. Ground lease properties often carry lower LTV limits than fee simple.
What happens if I can't extend the ground lease?
If the lease expires without extension, the landowner typically takes ownership of all improvements (buildings) on the property. This is called "reversion." For the leasehold investor, the improvements are worth nothing at expiration, which is why the remaining term drives both value and financing.
Are ground leases a good investment?
For the right buyer, yes. You get a higher initial yield, you put in less capital, and the property can appreciate during the term. You also have to read the lease closely, know how many years are left, and have an exit plan. They work best for investors who understand the structure going in.
How is ground rent determined?
Initial ground rent is typically set as a percentage (4-6%) of land value at lease commencement. Subsequent escalations may be fixed (e.g., 3% annual), tied to CPI, or based on fair market value resets at specified intervals. Get the escalation structure right before you underwrite anything else.