Ground Lease vs Sale-Leaseback: What Is the Difference?

A ground lease is a long-term lease of land only. The landowner keeps title to the land. The tenant pays rent for the right to build on and operate from the site, funds the construction, and owns the building during the term. It is also called a land lease.

Because the tenant is paying for a building it will eventually give up, the term has to be long enough to recover that investment. One published explainer puts the usual range at 50 to 99 years, and a law firm writing about Florida ground leases describes 40 to 99 years. Those are descriptions from those sources and not a rule, but they show the scale: this is a commitment measured in generations of management.

The tenant also carries most of what an owner would normally carry. Property taxes, insurance, maintenance, capital repairs and code compliance generally sit with the tenant. One law firm describes the arrangement as a slow-motion sale with conditions attached, which is a useful way to think about it.

Ownership of the improvements is the sharpest difference between the two structures.

• Ground lease: the tenant owns the building during the term. At the end, the land and improvements generally return to the landowner, often at no cost, under what is called a reversion clause. Some leases instead require the tenant to remove or demolish structures, which is a real cost to plan for.
• Sale-leaseback: the investor owns land and building from the day of closing. You occupy as a tenant. You keep whatever rights the lease gives you, and at the end of the term you have no ownership to hand back or retain unless you separately negotiated a way to buy.

Reversion also shapes value over time. A ground leasehold with few years remaining is harder to finance and sell, so the remaining term affects what the tenant's position is worth throughout the lease. Extension options, a right to buy the land, or a right to match a third-party offer can change that picture, which is why those rights are often negotiated hard.

A sale-leaseback has its own version of this concern. Your renewal options determine how long you can stay in a building you no longer own, so they deserve the same attention as the price.

• What is leased: land only in a ground lease; land and building in a sale-leaseback.
• Who builds or holds the building: the ground tenant builds and holds it during the term; in a sale-leaseback the building already exists and the investor buys it.
• What the owner of the real estate receives: ground rent paid over time, rather than a single payment; a sale-leaseback seller receives the purchase price at closing.
• Who the landlord is: a landowner, who may have owned the site for decades; a sale-leaseback landlord is an investor who chose your building and underwrote your company.
• Length: ground leases are described in the sources above as running many decades; one broker guide describes sale-leaseback terms of 15 to 20 years or more, with renewal options. Your deal may differ.
• Rent changes: ground rent commonly rises on a schedule, by index, or through appraisal resets; leaseback rent commonly rises through contractual escalations.
• Financing the tenant position: a ground tenant usually borrows against the leasehold; a leaseback tenant has no real estate left to borrow against.

A lender on a ground-leased project is lending against the lease itself. For that reason, a financeable ground lease commonly gives the lender notice of tenant defaults, time to cure them, and the right to step in, and it limits the landowner's ability to amend or terminate the lease without the lender.

The term to learn is subordination. In an unsubordinated ground lease, the landowner keeps first priority, so the land is protected and the tenant's financing is harder to arrange. In a subordinated ground lease, the landowner ranks behind the tenant's lender. Loans are easier to obtain, but the land is at risk if the project fails, and rent is often higher to reflect that.

Fair market rent resets are, in one law firm's view, the most contested point in these leases. The appraisal instructions matter: valuing the land as if vacant, excluding the tenant's building, produces a very different number from valuing the improved site.

Most companies that ask about this comparison own a building and operate from it. For them, the two structures are rarely substitutes.

A sale-leaseback is built for that situation. You stay where you are, the building continues to serve the business, and you turn the equity into cash. A ground lease of your own site to a third party generally means someone else builds on it and operates there, so it suits an owner with surplus land or a company leaving the site, not one that needs the building every day.

A ground lease as the tenant is a different question. It can make sense if your company wants to build a new facility on land it cannot or does not want to buy. You spend less up front because you are not paying for the land, but you fund the building, and it generally goes back to the landowner at the end. Our guide on build-to-suit covers other ways to get a new facility without funding it all yourself.

• ✓Do we need to keep operating in this building, or do we have land we do not need?
• ✓Do we need a lump sum now, or would a rent stream over decades serve the owners better?
• ✓If we are the ground tenant, does the term run long enough to recover our construction cost and leave room to refinance or sell?
• ✓What happens to the building at expiration: reversion, removal, or a purchase right?
• ✓Who pays taxes, insurance and capital repairs under each draft?
• ✓How would rent reset, and what are the appraisal instructions?
• ✓Have our CPA and attorney reviewed the tax and accounting treatment of each option?

A sale-leaseback is a sale, and a sale is generally a taxable event, with gain measured against your adjusted basis. An owner who ground leases land instead of selling it does not trigger gain from a sale at the outset and receives taxable rent over time. Tax treatment varies with the facts, so confirm any of this with your CPA.

On the accounting side, neither option makes a lease obligation disappear. Under ASC 842, a seller that qualifies for sale treatment records a right-of-use asset and a lease liability for the leaseback, so the lease goes on the balance sheet. If the transaction does not qualify, for example because of most repurchase options or a leaseback classified as a finance lease, it is accounted for as a financing. Ask your CPA how any long land lease you sign as tenant would be treated before you compare the two on paper.

When we advise on a sale-leaseback at TAG, we start by testing it against the alternatives the owner is actually considering, including structures that keep the land, because the right answer depends on how long the business needs the site and what the cash is for.