Ground leases, explained: owning the dirt under the store

The definition

In a ground lease, you own the land and lease it to a tenant who builds and owns the improvements on it. They handle essentially everything; you collect ground rent. At the end of the term, the improvements typically revert to you, the landowner.

Applied to retail investment property

Ground leases show up under strong-credit tenants, quick-service restaurants, banks, drive-thru retail, that prefer to control their buildings. For the investor, it's one of the most passive, lowest-risk positions in retail: your basis is the land, which is the most durable part of any real estate.

What to watch out for

• Lower yield: the safety comes at a price, ground leases usually trade at lower cap rates than fee-simple deals.
• Subordination and reversion terms: whether the ground lease is subordinate to the tenant's financing, and exactly how improvements revert, materially change your risk.

How to leverage it as a strength

A ground lease is a defensive, inflation-resistant land position with a built-in future windfall: the building becomes yours at term end. It's a way to own premier corners with minimal management and maximum durability of basis.

Best case vs. worst case

• Best case: you own irreplaceable land under a thriving tenant, collect hands-off rent, and inherit valuable improvements at reversion.
• Worst case: an unsubordinated or poorly structured lease, or a tenant departure late in the term, leaves you with a specialized building and a lease-up problem.

General education, not investment or legal advice, read the actual ground lease.