Let’s start with a question:

If you had $2 million and wanted to open a drive-thru Starbucks, would you rather:

A) Buy the land and the building

B) Lease the land and own the building

C) Let someone else own both and work for tips?

If you answered B, congratulations, you might just understand the power of the ground lease.

So What Is a Ground Lease?

A ground lease is exactly what it sounds like:

You lease the ground (the land) while building and owning everything on top of it.

• The tenant owns the building improvements (like a Starbucks or Chipotle).
• The landowner retains ownership of the dirt beneath.
• The lease term is typically 50 – 99 years (because no one’s building a $2M store on a 3-year deal).
• At the end of the lease? The landowner usually gets the building too.

Why Would Anyone Agree to This?

Good question. Let’s break it down.

Why Tenants Love Ground Leases

Imagine you’re Starbucks. You want to pop up on every suburban corner from coast to coast.

You have two choices:

• Tie up millions buying land, slowing expansion.
• Ground lease the site, keep your capital, and control the brand experience.

Smart operators pick Option 2.

Starbucks gets:

• A prime location without buying the dirt
• Full control of their building design, operations, signage, etc.
• Long-term site security (leases often include renewal options extending past 99 years)
• Capital flexibility to build 100 stores instead of 50

The goal? Asset-light growth with predictable real estate control.

Why Landowners Love Ground Leases

Now flip the script. You own a one-acre pad at a busy intersection. You could:

1. Sell it for $1.5M (and pay capital gains),
2. Or ground lease it to a national tenant for 99 years and generate passive income for life.

Many savvy landowners (think families, trusts, REITs) choose the ground lease. Here’s why:

• Steady, long-term income with no landlord responsibilities (NNN or absolute NNN leases)
• Appreciation upside as land values rise
• Control of the land after lease expiration or default
• Tax benefits if you defer sale and lease instead
• Legacy planning – passive income passed down to heirs

 

How Do You Sell a Ground Lease?

Let’s say you do want to sell after setting up a ground lease. How?

You’re not selling dirt anymore – you’re selling an income stream.

Here’s how it works:

1. You sign a long-term lease with a strong tenant (like Chase Bank or Chick-fil-A).
2. That lease generates a reliable, passive income stream.
3. Investors (especially 1031 buyers) pay top dollar for that cash flow.
4. You sell the land with the lease in place, often at a 4 – 6% cap rate, depending on tenant quality.

It’s like turning soil into a bond.

Should You Buy a Ground-Leased Property?

Let’s say you find a Starbucks ground lease for sale. Should you bite?

Pros of Buying a Ground-Leased Investment

• Predictable, passive income (often 15–50+ years remaining)
• Credit tenants with long-term track records
• Minimal expenses (usually NNN or absolute NNN)
• Attractive to 1031 exchange investors
• Bond-like stability, but backed by real estate

Cons to Keep in Mind

No ownership of the building, only the land

Value depreciates as lease term shortens (like a melting ice cube)

Limited upside – no rent participation unless structured into lease

Hard to finance with short lease terms or weak tenants

Zero control over what’s built or done on the site

So… is it a smart buy?

It depends. If you’re looking for mailbox money and don’t need appreciation, yes. If you’re hunting for value-add upside, probably not.

 

Final Thought: Control the Dirt, or Control the Deal?

Ground leases are one of CRE’s most misunderstood, but most strategic, tools. They can unlock expansion for brands, generational wealth for landowners, and stable yield for investors. So next time someone asks, “Why would you buy the building but not the land?”—you can smile and say: “Because I like my money working harder than my shovel.”