It is one of the most common reasons a good building gets sold. A partner wants to retire. An estate passes to three children and one of them wants cash. The others want to keep the property, but nobody has the money to buy the departing share, and nobody wants a loan. Selling the land under the building can fund the buyout and leave the building where it is.
Illustrative only. Not an offer. Three siblings inherit a commercial building, free and clear, appraised at about $15 million. It produces $1,050,000 of NOI. Each sibling owns a third. One wants out. Her third is worth about $5 million.
| Before | After the land sale | |
|---|---|---|
| Owners | Three siblings | Two siblings |
| Land sold to Valor | — | $5,000,000 at closing |
| Paid to departing sibling | — | About $5,000,000, less costs and any tax at the entity |
| Building NOI | $1,050,000 | $1,050,000 |
| Ground rent (fixed, quoted in writing) | — | $300,000 a year, with small fixed annual bumps |
| Cash flow to owners | $1,050,000 split three ways | $750,000 split two ways |
| Each owner’s share | About $350,000 | About $375,000 |
| Coverage of ground rent | — | 3.5× |
The departing sibling gets her cash. The two who stay keep the building, every future rent increase from its tenants, the depreciation on the improvements, and the right to sell or refinance the leasehold later. In this example their cash flow each goes up slightly, because the land price matched the departing share and the rent was a small slice of NOI. Real numbers depend on the property, the appraisal and the lease. We quote land price and rent on the property, in writing.
| Cash-out refinance | Full sale | Land sale and leaseback | |
|---|---|---|---|
| Remaining owners keep the building | Yes | No | Yes |
| New debt | Yes, with a maturity | None | None |
| Payment | Debt service, often a rate that resets | — | Fixed ground rent, non-amortizing |
| Refinance risk | Every five to ten years | — | None on the land |
| Personal guaranty or covenants | Often | — | Lease covenants only |
| Tax at closing | Usually none | Gain on everything, including recapture | Gain on the land portion only |
A cash-out refinance is often the cheapest money in year one. It is also a loan with a maturity date, a rate that may reset, and covenants a family that has always owned free and clear may not want. It turns a disagreement about cash into a shared obligation to a bank.
A full sale settles everything and ends the family’s ownership. The owners who wanted to keep the building lose it, and the tax bill includes depreciation recapture on the building.
The land sale fits when the remaining owners want to keep the building long term, do not want debt, and the departing share is roughly what the land is worth. If the departing share is much larger than the land, a land sale can fund part of the buyout, and the rest has to come from somewhere else. We compare the whole-sale path in ground lease vs selling the property.
Most buyouts stall on value, not on money. The departing owner thinks the building is worth more. The ones staying think it is worth less. Settle that first, with one independent appraisal everyone agrees to accept, or with the formula in the partnership or operating agreement if there is one.
Then read the agreement for anything that controls a sale of the land: a right of first refusal, a consent requirement, a buy-sell clause, or a lender approval on existing debt. If there is a loan on the property today, it is usually paid off at closing from the land proceeds or the lender consents. Plan for it either way.
Last, decide who signs. The entity sells the land and signs the lease. The departing owner’s exit is a separate document between the owners, closed at the same table. Keep both on the same timeline so nobody is paid before the land sale funds and nobody waits after it does.
A land sale takes weeks, not days: appraisal, title, survey and the lease itself. Estates add time for probate and court approval where it applies, so start earlier than you think you need to.
Land was never depreciable, so a land sale carries no depreciation recapture on the land. The gain is measured on the land portion only, and the building’s basis stays with the owners. Heirs who inherited the property may have a stepped-up basis, which can make the gain on the land small. How the proceeds are distributed to the departing owner, and how that distribution is taxed, depends on how the entity is set up and how the buyout is papered. That is a question for your CPA and tax counsel before you sign anything. More in taxes on selling the land under your building.
The NOI, the most recent appraisal or a recent valuation, any existing debt, and the size of the share being bought out. From those we can tell you whether the land covers the buyout, what the rent would be, and whether the building can carry it. The full mechanics of the sale are in sell the land and lease it back.
The land, on a 99-year lease: nothing to manage, senior to the building’s lender, low yield because the buyer is buying the right to not pay the tax. The building above it: higher yield, paid monthly, depreciable. Both are replacement property. Both close on a date we control, which is the part that matters on day 140.
1031 SolutionsWorking with an intermediary? The standby sheet for line 3 of the identification form.
The ownership entity sells the land under the building to us and leases it back for 99 years. The sale proceeds are used to buy out the departing partner or heir. The remaining owners keep the building and pay a fixed ground rent.
It can be when the remaining owners want no debt. A refinance has a maturity, often a resetting rate, and covenants. Ground rent is fixed and non-amortizing, with no maturity on the land for 99 years. A refinance may be cheaper in year one.
Then the land sale funds part of the buyout and the rest has to come from cash, a seller note or a modest loan. We will tell you up front how much the land can fund.
The gain is on the land portion only, with no depreciation recapture on land. Heirs may have a stepped-up basis. How the buyout is structured changes who is taxed and how, so get a CPA and tax counsel involved before signing.
Yes. They own and run the building, keep its upside and depreciation, and can sell or refinance the leasehold later. The ground lease is unsubordinated, so the land is never pledged to their loans.
NOI, a recent valuation, any existing debt, and the size of the departing share. We will tell you whether the land covers it.