What distinguishes a “ground lease” from an ordinary real estate lease? Like an ordinary lease, under a ground lease a tenant or lessee pays rent to a landlord or lessor and receives in return a right to possession and use of the property for the time period covered by the rent.

During the term of a ground lease, the tenant owns any improvements made to the property, including any buildings it constructs. For example, many Macy’s (NYSE: M) department stores are ground-leased. The tenant pays rent on the land but owns the buildings and other structures/improvements.

At the end of the lease term, the landlord retains ownership of the improvements made by the tenant. The landlord gives up use of the land for a long period of time and also risks the loss of the property if the tenant uses it as collateral for a loan.

A land lease, also called a ground lease, is a lease agreement that permits the tenant to use a piece of land owned by the landlord in exchange for rent. Land leases work very similarly to the way traditional property leases operate, and tenants can enter into both residential and commercial agreements.

A ground lease involves leasing land for a long-term period—typically for 50 to 99 years—to a tenant who constructs a building on the property. Many landlords use ground leases as a way to retain ownership of their property for planning reasons, to avoid any capital gains, and to generate income and revenue.

A ground lease is an agreement between a landowner and a tenant, in which the tenant leases land for a new build. The lessee is the owner of the building only, and is responsible for all the expenses and costs associated to constructing and maintaining a business location on a leased piece of land.

Financial Advantages For the property owner, the major financial advantage is that a ground lease allows them to generate a passive income stream from a vacant piece of commercial property without having to do much work. The economics of leasing land instead of buying it can make for a very profitable investment.

In short, yes, Ground Leases can be a very good investment. But, the structure, duration, and finances of the lease itself must be considered very carefully prior to committing to a deal that involves one.

One ground lease advantage is that landlords have the security of a long-term tenant and future appreciation of the property because of development. Buildings and improvements completed by the tenants become the property of the landlord unless otherwise stated in the contract.

Landlord Benefits A ground lease typically contains an escalation clause that guarantees increases in rent and eviction rights that provide protection in case of default on rent or other expenses. There are also tax savings to a landlord who uses ground leases.

Because a ground lease allows the landlord to assume all improvements once the lease term expires, the landlord may sell the property at a higher rate. Ground leases are also often called land leases, as landlords lease out the land only.

The inherited improvements allow the owner to sell the property for more money, if so desired. Typically, a ground lease lasts from 35 to 99 years. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee must demolish.

Section 92.001 of the Texas Property Code defines a lease as “any written or oral agreement between a landlord and tenant that establishes or modifies the terms, conditions, rules, or other provisions regarding the use and occupancy of a dwelling.”

In the case of a foreclosure, the lender can sell the property. In contrast, in a ground lease, the only rights the lender can take as collateral are the ground lessee’s leasehold estate in the land, plus the ground lessee’s ownership of the improvements on the land.