A Ground Lease Lets The Tenant Build While You Collect

The easiest commercial real estate deals to manage often look almost too simple on paper: own the land, lease it to a strong tenant, and let them pay to build the building. That is the promise of the ground lease, and we dig into what makes it work, when it fails, and why the best locations can command terms that most investors never see.

We walk through the real definition of a ground lease and why it is usually tied to national, multi-site operators like fast food and gas station brands. Tenants typically want to buy their sites because it reduces friction and can make financing easier, so we explain the one lever that changes the conversation: time. Long lease terms, often around 20 years with renewal options, help tenants justify construction while giving the landowner stable rent and fewer landlord headaches.

Don challenges the common “what happens at the end?” question, and we get specific about reversion and risk. The building does not get hauled away. Signs and equipment might, but the improvements typically stay with the ground owner, which is a huge part of the downside protection people miss. From there we compare ground leases to build-to-suit deals, including the quick math behind yield on cost, cap rates, and how developers target a basis-point spread when they sell.

We also talk about the hard truth: not every parcel is ground-lease material. The sites that win are scarce and hard to duplicate, like grocery-anchored outparcels and prime corners in constrained markets. If you want to do this right the first time, we close with straightforward advice on getting experienced commercial representation. Subscribe, share Blue Dirt with a friend who invests in CRE, and leave a review so more builders and buyers can find the show.

Learn more about Blue Commercial Properties on our website.

Transcript

Why Blue Dirt Focuses On Buildings

Michael Carro 0:00

Welcome to Blue Dirt, the podcast that digs deep into the foundation of commercial real estate investing. Unlike most real estate shows that focus on deal making and market trends, Blue Dirt gets into the nuts and bolts of what truly builds long-term value, the building itself. We break down how to spot deferred maintenance before it costs you, why a solid preventative maintenance program is a game changer, and how triple net leases can maximize your investment returns. We'll also explore the importance of strong landlord-tenant relationships and how they drive stability and growth in your portfolio. Whether you're a seasoned investor or just getting started, Blue Dirt gives you the practical knowledge to make smarter, more profitable decisions in commercial real estate. It's time to get your hands dirty and build value from the ground up. Let's dig in. Welcome to another episode of Blue Dirt, where even idiots can make a killing in commercial real estate. I'm Michael Carroll with SVN Southland Commercial Real Estate, and I'm joined by with who? Don Redhead with Blue Commercial Properties. And today, it's gonna be a very fast episode, or at least we think so. We're gonna talk about ground leases, which is a kind of a rare thing uh in commercial real estate uh for most of us. Um, but they're a fantastic uh opportunity for investment real estate. So um, so what is a ground lease? You might ask. Um so a ground lease is where um a property owner of typically a high valued property will ground lease their property to a typically it's an end user, usually a national type end user, that will then take that property, build their building, and operate their business. And so those are typically very coveted because very low landlord or property owner risk. The tenant is building their building with their money, and you as the property owner are gonna collect rent. So, how does that typically work? So there are some inherent challenges with that. Um, first of all, everybody that uh I'm not gonna say everybody, but most of the time, the people that are building buildings, they want to buy the land. That's their preferred. But if you have a if you have a very special piece of property, let's say it's at the corner of Maine in Maine, or um, or the idea of buying property in this area, it's such a tight market that nothing's available and and a brand wants to be there, they will, they will do that. Um sometimes it's also uh acceptable because they don't have to outlay that money to buy the land, uh, even though they would prefer to. And let's just talk about why it's a preference. Number one, you don't have the hassle of having a landlord, number, number one. Number two, it's easier to finance an entire package if you have the land and you're building the building. So financing can be easier. But how is that overcome? It's overcome with length of lease. So most ground leases are gonna be a minimum of 20 years with four or five-year options to renew. So your fast food companies, your gas station companies. We're talking uh companies that have lots and lots of locations typically are your prime candidates for a ground lease. They're looking for the best location in a specific market, even if they have to ground lease. Now, there are going to be people out there, companies out there that will not do a ground lease. That's just part of their mantra, they won't do it. And that's okay. And then there's companies who say, I don't care what it is, as long as I get the best possible uh location for my business. If it's a ground lease, great. If it's a sale, great. If it's a building that's an existing building that I can also lease out like a normal traditional lease, great. But uh, it's all about the real estate for these companies. And so they will forego their preference, which may be to purchase if they can get the right location. So that's typically how a ground lease would function. And Don, you said you had some questions. So let's start off with you.

Don Redhead 4:41

Uh so say I'm the the individual, so I'm the ground lease. Yeah, say it was a 10-year, two, five-year options. At the end of that, what happens? I mean, is it is it it just gets turned over? Well, I could just what happens?

Michael Carro 4:58

Yeah, so good, good, very good question. It's not like people are gonna take their building and go home. I mean, they actually leave the building. Um, it's it they don't tear it down, they don't, they might de-brand it, they're gonna take off their signs and take away as much of their equipment as possible. Um, but no, at the end, that building stays. So that is the advantage. Now, you mentioned a 10-year with two, five-year options. That's gonna be a rare thing. That's that's not what the bank wants to see. You know, you have got to have at least a 20-year commitment because most loans um uh are gonna have a 20-year term, uh, a 20-year amortization, even though the term might be less than 20 years, five or 10, unless you have an SBA loan, which is a fully amortized 20-year uh AM and a 20-year term. So you're not gonna likely do a 10-year lease on a ground lease. So the advantage to a landlord is they have a very long secured tenant in place. Now, but to your question, if at the end of that 20 years, or let's just say that company went bankrupt, because that happens too, even with big companies.

Don Redhead 6:05

Right.

Michael Carro 6:06

That property, the what was built on that property is still gonna revert to the landlord or the property owner, the the underlying uh ground owner. And so it's not like the tenant is gonna come in and tear the building down. Again, they're gonna take all of their assets from it.

Don Redhead 6:23

Now, it seems like a lot of times you see, and is it the same thing with a uh the build-to-suit signs, or is that a variation?

Build-To-Suit Deal Math

Michael Carro 6:32

It's a variation. So a build to suit is is different in the sense of, okay, I I'm buying a piece of property and I'm gonna build your building to suit your needs. Build to suit. So let's hypothetically say that you have a uh um a Wendy's and I have a property and I don't want to sell my property. So what I'm gonna do is I'm going to, I might say, hey, Wendy's, I'm gonna build your prop property to suit your needs. So I'm gonna do a build to suit. And the way I would value that is a little bit different than the ground lease. The ground lease, I might just say, hey, it's uh it's a hundred thousand dollars a year ground lease and for 20 years, and I'll have increases built into that. And um, and that's it. So, but let's just use the same$100,000 and I'm gonna do a build to suit. So I have$100,000, which probably means I have a property worth maybe a million dollars, right? So let's just say I have a property that it's worth a million dollars, and I'm gonna build your building that's gonna cost me a million. Let's I gotta use easy easy math. To build your building, it's another million dollars. So I've got a$2 million investment. Then I'm gonna uh identify a percent number to lease it out. So let's just say we land on a percent of eight percent of my investment. My investment is the million dollars of land and the million dollars of the building, two million dollars, times eight percent equals$160,000. That's the new lease for the Wendy's that I'm gonna turn over to you. Okay. Now, how did I arrive at the 8%? Usually I have a differential, a delta that I'm looking for of what I believe I can sell the Wendy's on the investment market. And again, I'm gonna sell it on the cap rate market, which I might let's say my goal is to get 200 basis points. So I think that I can sell the Wendy's. It's a now this is a reverse thought process of math. I can sell it at a 6% cap rate. So my lease is at 8% of my cost, and I'm gonna try to make a 200 basis point spread. So while Donnie is gonna pull out his calculator and he's gonna take a hundred and take it, he's gonna take$160,000 rent and divide it by 0.06, which is 6%, and that's gonna give me a sell price, which is going to be higher than my cost of$2 million. So I do the lease, it's$160,000. I'm gonna try to sell it at a cap rate of 6%, which means I'm gonna try to sell it at a lot of sixes.

unknown 9:35

Okay.

Don Redhead 9:35

$2,000,$666,000,$666,000.

Michael Carro 9:39

Okay. So I have the potential of making a$600,000 uh spread on this investment, um less less cost, right? Let less uh closing costs and commissions and things like that. So um now again, the build the suit market is very competitive. So maybe you can find somebody that's only looking to do$150 basis point spread or$100 basis point spread. So if I take the same 160,000 and divide it by a 7% cap rate or 0.07, it's gonna be less than the 2.5.

Don Redhead 10:14

285.

Michael Carro 10:16

What?

Don Redhead 10:16

285,000 difference.

Why Only Special Sites Work

Michael Carro 10:19

No, just tell me what the do 160,000 divided by 7%. 2,285,000. 2,285,000. So that 100 basis point difference still gives the developer almost a$300,000 profit, but it's$300,000 less than if it was an 8% uh or a 6% cap rate. So so that's what the primary difference is. But um uh both are very sellable on the investment market. Uh the ground lease, of course, it's gonna sell for less because your cost is less, meaning you're only getting$100,000 of lease rate in this example that I gave earlier versus$160,000 uh that we mentioned a second ago. So a couple differences. Um, but if you could, if I could do nothing but ground leases with properties that I owned, that's all I would ever do. It'd be great. But but most of the time, you don't have these great, great assets that people are willing to ground lease. Another reason is let's say I have a piece of property here, and a lot of people have this misnomer. They think that any property can be ground leased. They're right, it can be, but there's not people who want to ground lease because they think it's better. Uh, it's usually you have to have a coveted piece of property that is in a constrained market. Um, so if you have a piece of property that's just in a random place that I could just as easily buy the property next door or down the street, and it's kind of the same. Everybody's gonna choose to buy it and build it, not ground lease. Ground lease is reserved for something special. Maybe I have a grocery-anchored outparcel that the grocery store draws in a huge number of people. Well, that's an advantage to uh to uh certain brands, right? So they know that, man, I want to be uh on the outparcel of a Walmart or a Publix or you pick the big box that you like, a Target, right? Well, those are those are coveted areas. There's only so many outparcels. And so the owners of those outparcels may choose to ground lease. So that's kind of what we're talking about. Uh very, very special property that not not easy to duplicate in the market.

Don Redhead 12:39

Any kind of elementary mistakes that someone should avoid the first time they they are trying to do a ground lease? Is there anything that's really kind of just duh?

Subscribe Share And Send Questions

Michael Carro 12:53

Well, first of all, I mean, hire an experienced commercial real estate agent. Um, don't don't bring on somebody who who is a residential agent to do a uh commercial deal. Hire somebody with experience. Um, there's a lot of great brands out there. Obviously, I'm with SVN, which is a national brand, but there's a lot of really good brands. J L L, C B R E, NAI. Um you've got a lot of really good brands out there that just do such a good job. So find the most experienced commercial real estate broker in your area and and and lean on them for that guidance. Um, and I think you'll have the greatest chance of success. So that's it. That's all I have. Told you it would be fast, folks. That wraps up another episode of the Blue Dirt Podcast, where even idiots can make a killing in commercial real estate. That's a wrap for this episode of Blue Dirt. We're here to help you build smarter, invest wiser, and create long-term value in commercial real estate. One solid foundation at a time. If you found today's insights useful, be sure to subscribe so you never miss an episode. And if you know somebody who could benefit from these discussions, share Blue Dirt with them. Got questions or topics you'd like us to cover? Reach out. We'd love to hear from you. Until next time, keep digging deep. Stay sharp, and remember real value is built from the ground up. See you on the next episode.