The Ground Lease


A ground lease is a powerful tool appropriate to very specific situations. Typically these involve a third party major user (credit tenant) who influences the negotiations and affects value for a very long time. In some cases the lease contains an option to purchase the land after a specific period. Modeling such a transaction from the developer/ground lessee’s standpoint involves understanding the dynamics of a so- called “sandwich” position.

Ground lease escalations usually restrain rent below the market as they track the major tenant lease. Because market forces operate independent of these contractual relations, at times the major tenant lease is a burden and at other times it is a benefit. The developer’s option position is at various times “in the money” as discount rates change. This position appears above the flat plane in the graphic above.


Even without an explicit option, differing economic times and local events offer opportunities for early termination during the lease.

The negotiation of such matters requires the careful assessment of future prospects. The parties face crucial decisions at each of the lettered points in time on the graphic to the right. The investor must be in a position to evaluate the risk and reward of acting at any of these critical times.