Ground leases come to market with whatever term happens to be left. The listing shows a strong tenant, annual increases and a low asking yield. What you are buying is two separate things: the rent until the lease ends, and whatever the land is worth to you on the day it does. With 99 years left the second barely matters. With seventeen left it is a large part of the price.
This part is arithmetic. Take the rent schedule in the lease, with its increases, to the last day of the current term. Check who pays taxes, insurance and upkeep, and whether anything can reduce the rent. Then look at who owes it: the parent company, or a single-purpose subsidiary whose only asset is this location.
Compare what that stream pays you with what a long government bond pays over the same years. A short lease to a private tenant should pay you more than that, not less.
Listings add the option periods to the term. Be careful. An option lets the tenant stay on terms that were set decades ago. The tenant will use it when the site is worth more to them than the rent, and walk when it is not.
So ask how essential the land is to the tenant’s operation. Land under the tenant’s own building, or the only parking for a hospital, is hard to replace. A pad the tenant could move across the street from is not. Read the option terms too: what the rent is in each option period, and how much notice the tenant must give.
When the lease ends you own the land outright, and in most leases whatever is built on it. What that is worth depends on the zoning, the size and shape of the parcel, and whether anyone other than today’s tenant would want it. Value the land as if it were vacant, and treat any building as a bonus you may have to pay to remove.
Check the listing’s land area against the county record. Offering memoranda are sometimes wrong about the one number that decides this part of the value. How appraisers split the two interests is on how ground leases are appraised.
Sellers of leased land often ask a price that assumes the tenant stays through every option. Buyers pay for the term that is certain, plus the land. The gap between the two can be wide, and brokers will often tell you where the seller would really trade if you ask.
Ask also why it is for sale. An owner raising cash for another project has a deadline. That matters more than the asking number.
A tenant with seventeen years left has a problem of its own: the building on the land gets harder to finance and harder to sell every year. That gives both sides a reason to replace the old lease with a new long one. When that happens, a short lease with an uncertain ending becomes a long lease with a certain one, and it is a different investment.
That is work we do. We buy leased land as a principal with our capital partners, and we write new leases for investors who want to own them: ground leases made to order. What to check on any ground lease is on how family offices buy ground leases. Exchange buyers should also read buying a ground lease with 1031 proceeds.
General information, not investment, tax or legal advice. We sell whole real estate interests only. Fractional interests are not offered on this site.
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.
Two things: the rent owed until the lease ends, and the land, with anything built on it, when it ends. Value each part separately. With many decades left the land at the end adds little to the price; with under twenty years left it adds a lot.
Only if the tenant cannot easily leave. Options are the tenant's right to stay, not the owner's right to the rent. Ask how essential the land is to the tenant's operation, what the rent is in each option period and how much notice the tenant must give.
Sellers often price the lease as if the tenant will stay through every option. Buyers pay for the term that is certain plus the land. Ask the broker where the seller would really trade and why the property is for sale.
Whatever a buyer would pay for it then, given its zoning, size and location. Value it as if vacant, and check the land area against the county record.
Yes, if the tenant agrees. A tenant whose building is getting harder to finance has its own reason to sign a new long lease. A new lease replaces an uncertain ending with a certain one.
The offering memorandum and the lease if you have it. We will tell you how we would value the two parts.