Acquisitions
Ground Lease or Fee: What Changes in Your Underwriting
A leasehold deal can look identical on a cap rate and behave completely differently on an exit.
Two properties, same income, same cap rate. One you own outright; the other sits on a ground lease with 34 years remaining. They are not the same asset, and the difference shows up in three places your standard model does not automatically catch.
1. Your NOI is not your NOI
Ground rent is an operating expense that behaves like debt, fixed, senior, and usually escalating on a schedule or a CPI formula. Net operating income after ground rent is what you actually own, and any cap rate quoted before it is meaningless.
Worse, ground rent escalations are frequently steeper than your ability to raise rents. A lease with fixed ten percent bumps every five years against retail rents growing two percent a year compresses your margin every single reset.
2. The exit depends on remaining term
This is the one that gets people. A leasehold with 60 years left prices close to fee. One with 25 left prices materially wider, and one with 15 left is close to unfinanceable, most lenders want the loan term to end well inside the ground lease, often with 10 to 20 years of runway beyond maturity.
So a ten-year hold does not just consume ten years of income. It consumes ten years of your remaining term, and the buyer behind you pays for what is left. Model the exit cap wider than your going-in cap for that reason alone, independent of any market view.
3. Reversion and improvements
Read what happens at expiry. In most ground leases the improvements revert to the landowner for nothing. That means the building depreciates toward zero on a fixed schedule regardless of how well you maintain it, and your capital plan should reflect a shortening runway rather than a perpetual asset.
How to model it quickly
Deduct ground rent from NOI before anything else, escalate it on its actual schedule rather than your rent growth rate, hold the term remaining in front of you, and widen the exit cap by 50 to 150 basis points depending on what is left. If the deal still works, it works.
Set it up: levered returns with a full DCF, treat ground rent as a fixed expense and test the exit cap where the deal stops clearing your hurdle.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
Built with the underwriting model on this site. How it compares with the licensed product.