On a ground lease, you build on and use land that someone else owns, under a long term lease rather than a purchase. It is a real interest in real estate, and it can be insured and financed, so let me explain how it works.
Written by Adam L. Engel, Esq., Principal and real estate attorney at Prime Title & Escrow
Not every commercial occupant owns the ground under its building. Under a ground lease, a tenant leases the land for a long term, often many decades, and typically owns or constructs the improvements on it. This structure is common for retail pads, hotels, and development sites, especially in dense, high value markets. A leasehold is a genuine property interest, and it raises its own title and closing questions.
Insuring and financing a leasehold builds on the same title framework I describe in my guide to commercial title insurance, applied to a lease rather than to ownership of the land.
A ground lease gives a tenant a long term right to use land, usually while owning the building on it, without buying the land. That leasehold interest can be insured with a leasehold title policy and used as collateral for a leasehold mortgage. The key diligence is the lease itself, its term, its rent, its lender protections, and what happens to the building at the end.
What a ground lease is
A ground lease separates ownership of the land from ownership of the building. The landowner keeps title to the land, called the fee, and leases it to a tenant for a long period, frequently 50 years or more. The tenant usually constructs or owns the improvements and operates the property during the term. At the end of the lease, depending on its terms, the improvements may revert to the landowner. Because the term is so long and the tenant invests so heavily, a ground lease functions much like ownership for the life of the lease, while remaining a lease.
The leasehold is an insurable interest
A tenant under a ground lease holds a leasehold estate, and that estate can be insured with a leasehold owner’s title policy. The policy insures the tenant’s right to possess and use the property under the lease, subject to the lease terms, in much the same way an owner’s policy insures fee ownership. A leasehold lender can likewise obtain a leasehold loan policy. The standard title forms include leasehold coverage and valuation provisions, so the leasehold interest is treated as the insured estate rather than fee ownership of the land.
On a ground lease deal the lease is the asset. Its length, its rent and escalation terms, its assignment and financing provisions, and its end of term treatment of the building drive everything. I read the recorded lease or its memorandum against the title work so you know exactly what interest you are buying or lending against.
Financing a leasehold
A leasehold can be mortgaged. A leasehold lender takes a deed of trust on the tenant’s leasehold interest rather than on the land itself, and the lender is insured with a leasehold loan policy. Because the lender’s collateral is the lease, lenders care a great deal about lender protections in the ground lease, such as the right to receive notice of a tenant default and a chance to cure it, and the ability to step in or assign the lease. A ground lease that lacks these protections can be difficult to finance, which is why they are negotiated carefully.
What to check during diligence
Beyond the lease protections, several items deserve a close look on a ground lease purchase or financing. These include:
- The remaining term, and whether it is long enough for your use and your financing to amortize comfortably.
- The rent and any escalation or reset provisions over the life of the lease.
- Whether the lease, or a memorandum of it, is recorded, so third parties have notice of your interest.
- Assignment and subletting rights, so you know whether you can transfer or finance the leasehold.
- What happens to the improvements at the end of the term, and any purchase or renewal options.
How the survey and exceptions fit
A ground lease deal still needs the same survey and title review as a fee purchase. The survey locates the improvements and any easements affecting the leased land, and the title commitment lists the matters that bind the property, including the ground lease itself and anything ahead of it. I walk through how the commitment and survey work together in my guide to the commercial title commitment and the ALTA survey. The difference on a ground lease is simply that the insured estate is the leasehold.
Where ground leases come up
Ground leases are most common where land is expensive and owners prefer to lease rather than sell, which describes parts of Northern Virginia and other built up markets. If you are taking or financing a ground lease anywhere in Virginia or West Virginia, I can insure the leasehold, coordinate the leasehold lender’s coverage, and make sure the lease you are relying on actually delivers the interest you expect.
Send me the ground lease and I will review it against the title work, insure the leasehold, and coordinate the leasehold lender’s coverage.
Get Your Free Quoteor call (703) 552-4155Frequently asked questions
What is a ground lease?
A ground lease is a long term lease of land, often 50 years or more, under which the tenant typically owns or builds the improvements and operates the property. The landowner keeps title to the land. At the end of the term, depending on the lease, the improvements may revert to the landowner.
Can a leasehold be insured with title insurance?
Yes. A tenant under a ground lease holds a leasehold estate that can be insured with a leasehold owner’s title policy, and a leasehold lender can obtain a leasehold loan policy. The standard title forms include leasehold coverage, so the leasehold is treated as the insured estate rather than fee ownership of the land.
Can I get a mortgage on a ground lease?
Yes. A leasehold can be financed with a leasehold mortgage, where the lender takes security in the tenant’s leasehold interest and is insured with a leasehold loan policy. Lenders pay close attention to protections in the ground lease, such as notice and cure rights, because their collateral is the lease itself.
What should I check before signing a ground lease?
Focus on the remaining term, the rent and any escalations, whether the lease is recorded, the assignment and financing rights, the lender protections, and what happens to the improvements at the end of the term. These provisions determine the value of the leasehold and whether it can be financed.
What happens to the building at the end of a ground lease?
It depends on the lease. In many ground leases the improvements revert to the landowner at the end of the term, while some leases include renewal options or purchase rights. Because this affects the value of your interest, it is one of the first things to confirm in the lease.
Is a ground lease the same as buying the property?
No. With a ground lease you hold a long term right to use the land and typically own the building, but you do not own the land. It can function much like ownership for the life of the lease, but it remains a lease, with a term, rent, and end of term provisions that fee ownership does not have.
This article is general information about commercial real estate closings in Virginia and West Virginia. It is not legal advice for your specific transaction, and your costs and requirements depend on your deal. Please confirm the details with me directly.