The headline rent tells you almost nothing. How it moves over ninety-nine years tells you everything, and it is where most of the value transfers.
Under a reset, a tenant who develops well, leases up well and grows NOI hands the landlord a larger rent at the next reset — because market rent for the land has risen partly on the back of what the tenant built. The tenant funds the value and then rents it back.
This is not theoretical. Reset clauses written in the mid-twentieth century produced rent increases in the hundreds of percent when they came due, and in several well-documented cases destroyed the leasehold's value entirely. Leasehold lenders remember this, which is why the clause is a financing problem as much as an economic one.
| Structure | Underwritable? | Comment |
|---|---|---|
| Fixed annual escalation | Yes | Cleanest. Model it to year 99 on one line |
| Fixed with periodic capped CPI test | Yes | Inflation protection with a known ceiling |
| Uncapped CPI | Marginal | Unbounded obligation; lenders discount it |
| Fair market value reset | No | Agency guidance treats it as unacceptable on an unsubordinated lease |
Our structure is 2% fixed annually with a CPI test every ten years capped at 3% annualized, and no fair market value reset ever. The cap is the part that matters. It means the worst case is knowable at signing.
Compare escalators on two dimensions, not one: how often they reset, and how high they can go. A quote that resets every five years at a 4% cumulative cap is more expensive over a long hold than one that tests every ten years at 3%, even if the starting rent looks similar and even if the headline proceeds are larger.
Run both to year 40 before deciding. The crossover is often earlier than sponsors expect, and the difference compounds for the rest of the term.
It re-strikes rent at a future appraiser's opinion, often partly reflecting value the tenant created. It makes the obligation unknowable and agency guidance treats it as unacceptable on an unsubordinated lease.
Usually, if capped. Uncapped indexation is an unbounded obligation and lenders discount it accordingly.
2 percent fixed annually, a CPI test every ten years capped at 3 percent annualized, and no fair market value reset ever.
On frequency and ceiling together, run to year 40. A five-year reset at a 4 percent cap costs more over a long hold than a ten-year test at 3 percent.
Sometimes, by amendment, but it requires the landlord to give up real value and usually the leasehold lender's consent. Far easier to never sign one.
Send any ground lease term sheet, ours or anyone else's, and we will run the rent to year 40 so you can see what you are actually agreeing to.
Email us the property