How to Evaluate Ground Lease Opportunities for Retail Use

Ground leases sit in a strange middle ground: they feel like “real estate,” underwrite like “credit,” and break your model if you treat them like either one exclusively. At their simplest, a ground lease is a long-term land lease where the tenant typically has the right (and obligation) to build and operate improvements on the land during the term, while the landowner retains the fee interest in the dirt and often receives the improvements (or control of them) at the end.

Retail is where this structure becomes especially practical—and especially easy to misprice—because the real value driver (sales and traffic) can change faster than the contract (often decades long). A cleanly negotiated ground lease can make a retail project financeable and transferable; a poorly framed reset clause or lender-protection gap can turn the same site into a refinancing dead-end.

This article approaches “ground lease investing” as two distinct opportunities that often get lumped together: (1) buying or originating the landowner’s ground lease cash flow (the leased-fee position) and (2) buying or developing the tenant’s place in the deal (the leasehold position—effectively the building and business economics, but on leased land). The underwriting questions overlap, but the feasibility assumptions and the real risk are not the same.

Why ground leases keep showing up in retail

A retail ground lease usually exists because one party wants long-term control of a location without tying up land capital, while the other party wants to monetize land, keep long-term ownership, and avoid taking development or operating risk. Those opposing motives actually fit together neatly in retail, particularly for pad sites/outparcels and build-to-suit projects where the building is specialized, but still “simple” compared with multi-tenant operations.

The retail formats that most commonly fit ground lease economics tend to share a few traits: they are location-sensitive; they can justify self-contained improvements; and they produce enough predictable cash flow to support long-term rent obligations and leasehold financing. That is why shopping center outparcels (ground-leased parcels carved out of a larger center) and certain build-to-suit retail boxes are recurring themes in industry education on ground leases.

A ground lease also functions as a financing tool. Rather than purchasing the land (large upfront equity and often non-amortizing value), the tenant converts that land cost into a contractual payment stream (ground rent). That can improve near-term project feasibility by reducing initial capital needs—while simultaneously inserting a senior-like fixed obligation that must be paid before equity sees a dime.

Even when the economics are sensible, retail can amplify risk through speed-of-change. Retail demand and tenant credit can pivot quickly (concept risk, format change, omnichannel shifts), while the ground lease is engineered for permanence. That mismatch is why “financeability” provisions—mortgagee protections, cure rights, assignment flexibility, and predictable rent mechanics—are not legal boilerplate in retail ground leases; they are value.

A practical starting point, especially for teams new to the structure, is the training and casework produced by the and the , both of which emphasize that ground leases change the financing and control framework, not just the rent line.

The mechanics that drive value in a retail ground lease

Every ground lease has two measurable “assets,” even if only one trades in your market: the landowner’s leased-fee interest (the right to receive rent subject to lease terms) and the tenant’s leasehold interest (the right to use the land and typically own/operate improvements for a finite term). Canadian and U.S. appraisal literature is consistent on the terminology: leased fee for the lessor; leasehold for the tenant.

That split matters because the value of the position you are underwriting depends on contract mechanics that do not show up in a standard fee-simple retail pro forma: how rent escalates, whether and how it resets, what happens after a casualty, how assignment works, and whether lenders can step in and keep the lease alive if the tenant fails.

Rent structure is the first lever—and the most commonly mis-modeled. Ground rents may step up at fixed rates, adjust using indices such as CPI, or incorporate “lookback” mechanics with caps; some ground leases also include participation features (a form of percentage rent). Public ground-lease investors describe typical lease terms as long (often decades) with contractual increases that may be fixed or CPI-based, and sometimes include percentage-rent participations.

Resets are the second lever—and the most dangerous one if you rely on historical templates without understanding current capital markets. Traditional “standard” reset structures described in legal commentary included periodic rent resets to a percentage (often cited around 6%–7%) of then-current land value, with smaller interim bumps. The same commentary notes that when land is valued using low discount/cap rates and highest-value comparables, the reset formula can push ground rent high enough to consume a building’s net operating income, destroying leasehold value and impairing financing.

In retail, percentage rent often appears in shopping center leases because it ties landlord income partly to tenant sales; conceptually similar participation can show up in ground leases as well. Contemporary commercial real estate guidance describes percentage rent as blending fixed rent with performance-based rent and notes it is most common in retail environments where sales performance is measurable.

Finally, understand that “ground lease” is not a single standardized product. Some ground leases behave like a highly predictable net-lease instrument; others behave like land banking with a complicated option structure; others are financing scaffolding for development that later converts into a more conventional asset. The only safe posture is to treat the lease document and its financeability terms as core underwriting data (not legal back-office).

A due diligence lens that matches how ground leases actually break

A disciplined evaluation process starts by acting like two underwriters at once: a site-and-retail underwriter (because the tenant’s ability to pay matters) and a contract-and-capital-markets underwriter (because terms determine financeability and exit). Industry materials on leasehold financing explicitly frame underwriting to treat ground rent as a priority expense—like taxes and insurance—and to analyze ground lease terms that impair leasehold value.

Site and retail fundamentals still matter, but your “where” questions change

Retail site checks are familiar—access, visibility, competing nodes, and trade area—yet ground leases add a twist: because the lease is long, you should underwrite the site’s adaptability, not just today’s tenant fit. Lender-focused guidance on financeable ground leases emphasizes the value of broad permitted-use clauses so that, after foreclosure or a concept failure, a lender or buyer can reposition the property without needing the landowner’s consent.

The same logic applies to entitlements and control of adjacent property. Shopping center ground leases frequently involve outparcels, shared access, easements, signage, parking fields, and restrictions tied to the main center. Industry outlines treat “control of adjacent property” and entitlement timing as central topics specifically because these items can become binding constraints on leasehold value and lender comfort.

Lease “financeability” is not a technicality—it is the exit

Ground-leased retail often needs leasehold debt at construction, stabilization, or acquisition. Multiple practitioner guides converge on a simple point: a leasehold lender’s collateral can be wiped out if the ground lease terminates, so the lender must have notice, cure, and continuation rights. In retail-focused workshop materials, the ground lessor is not allowed to terminate the lease while the leasehold mortgagee’s cure periods remain open; those materials also describe “new lease” rights that can effectively replace the terminated lease with an identical lease for the lender or its designee, subject to curing monetary defaults.

More broadly, lender and corporate counsel guidance describes a “financeable” ground lease as one that either subordinates the fee interest or provides robust leasehold mortgagee protections (in practice, protections are the more common route). That same guidance flags predictable rent, long term relative to the loan, exercisable renewal rights, and clear rights to mortgage the leasehold as recurring gating items.

If you only remember one diligence principle, make it this: anything that can unexpectedly accelerate ground rent or terminate the lease will be priced by debt markets first, and by equity markets second. National Realtor guidance referencing recent market disruptions notes that dramatic reappraisals in major ground-lease markets caused many leasehold mortgage lenders to avoid ground leases with reappraisal clauses.

Casualty, condemnation, and “who owns what” in a disaster scenario

Retail investors often underwrite “single tenant = simple.” Ground leases can make it simple operationally and complex economically. Lender-oriented ground lease discussions emphasize that because improvements are generally constructed and owned by the tenant during the term, casualty and condemnation proceeds should flow in a way that protects the leasehold estate and the lender (often by naming the lender appropriately and controlling how proceeds are applied).

Even in deals that are contractually straightforward, do not ignore environmental allocation. Ground-lease lender checklists treat environmental diligence and responsibility allocation as comparable in seriousness to fee-simple financing because liability and remediation obligations can follow the property regardless of the ownership split.

How feasibility assumptions change when the land is leased

Most pro formas for retail development or acquisition have stable skeletons: revenue, operating expenses, NOI, cap rate, debt sizing, and residual value. A ground lease rewires the skeleton. The trick is not “add ground rent as an expense.” The trick is to model ground rent as a claim on value that changes how the market will finance and price the asset—especially at exit.

Land cost becomes ground rent, but the risk does not vanish—it shifts shape

In a fee-simple build, you typically pay land upfront and then recover value at exit through a sale (land + building). In a ground lease build, you conserve upfront capital by not acquiring land, but you accept a long-term payment obligation. Industry seminars explicitly point out that, unlike principal repayment on a loan, ground rent payments are generally deductible for federal income tax purposes—one reason ground leases can look attractive in early-year cash flow planning.

However, feasibility changes immediately because stabilized NOI available to debt and equity is net of ground rent. Retail leasehold financing guidance frames underwriting to treat ground rent like taxes and insurance: a priority expense that must be paid before debt service. That means your “stabilized DSCR” model should treat ground rent as above-the-line in the capital stack, rather than just another operating line you can squeeze.

Exit math changes: you sell a leasehold, not a building on land

When you sell a fee-simple retail property, buyers capitalize NOI and price the whole parcel. Under a ground lease, the buyer of the operating real estate is buying a diminishing-term leasehold (even if the remaining term is long). That difference is not just semantics; appraisal literature emphasizes that leasehold interests are finite and tend to diminish as the term shortens, and you cannot assume that leased-fee value plus leasehold value will always equal fee-simple value.

A practical consequence is that exit cap rates and buyer pools may differ. Retail trade commentary directed at developers recommends analyzing what you will be paying over the life of the deal and at sale by applying an estimated cap rate to the ground lease payments—because many buyers will effectively capitalize that obligation when determining what they can pay for the leasehold.

Resets, caps, and CPI mechanics become first-order sensitivities

In ordinary retail underwriting, rent escalations matter, but they rarely decide solvency. In ground leases, the escalation design can be the entire deal. Public ground-lease investors describe CPI lookbacks with caps and deferred start years; they also explicitly warn in filings that capped CPI mechanics may not fully keep up with inflation and that lookback periods typically begin years into the term.

If your lease includes periodic reappraisal resets (or index resets without meaningful caps), you are underwriting not just “inflation protection,” but a future renegotiation with the capital markets. Legal and Realtor commentary on traditional reset structures highlights that resets tied to land value, when combined with low cap-rate land valuations, can produce ground rents that consume building economics—an outcome that predictably alarms leasehold lenders and can crater leasehold marketability.

Feasibility differences you should reflect explicitly in the model

Instead of a long checklist, it is more useful to name the half-dozen assumptions that truly change the answer:

• Ground rent is modeled as a contractual priority claim (with its own escalation path), not as a negotiable operating assumption.

• Debt sizing is based on NOI after ground rent, consistent with leasehold underwriting practice described in retail financing materials.

• Exit pricing reflects the market’s treatment of remaining term, renewal options, and assignment rights—because lender guidance treats term length and renewals as central to financeability.

• Renewal options are valued as financeability tools, not “free upside,” because lender/counsel guidance stresses mortgagee rights to exercise renewals and, in some structures, purchase options.

• Casualty/condemnation proceeds and rebuild obligations are modeled in a way that matches lender expectations, since lender-oriented commentary treats proceeds control as critical to collateral protection.

• Reset clauses are tested as stress scenarios (not just base case), reflecting repeated market commentary that resets can be the main driver of leasehold distress.

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Pros and cons for investors, separated by which side you are investing in

People say “I’m buying a ground lease” as if that describes a single risk profile. It does not. A leased-fee ground lease investment behaves like long-duration contractual income with a residual angle; a leasehold investment behaves like operating real estate with a structurally senior rent obligation and a finite term. The risk/return trade-offs and optimal feasibility assumptions differ accordingly.

Investor buying the leased-fee position

The cleanest version of this trade is: you buy (or originate) the landowner’s right to receive ground rent under a long-term, typically net-structured lease, while the tenant bears operating expenses and improvement risk. Legal commentary notes that ground leases are often structured as true triple-net arrangements where the tenant bears property expenses including maintenance, taxes, and insurance, leaving the landlord with limited obligations.

The main advantages, if the lease is well drafted, are straightforward. You get an income stream designed to be durable, often with contractual growth features (fixed increases, CPI mechanics, or a combination) and sometimes participation structures. Public filings by a dedicated ground-lease investor describe base terms commonly ranging from 30 to 99 years with contractual increases and occasional percentage-rent participation, which is consistent with the “bond-like plus residual” framing many investors use privately.

The risks are less obvious but highly real. First, your cash flow quality is only as good as the tenant’s ability to pay and the lender protections that keep the lease alive through distress. Retail leasehold financing materials describe how the leasehold mortgagee may need to fund ground rent through protective advances to prevent termination—good for the lessor’s continuity, but also a reminder that your “credit” can become complicated if the tenant fails.

Second, inflation protection is not automatic; it depends on the exact escalation design. CPI caps and deferred lookbacks can protect tenants from extreme spikes while leaving the lessor with imperfect inflation capture (a trade-off explicitly acknowledged in public filings describing such features).

Third, if your lease includes appraised-value resets, your risk is not just “higher rent later”; it is “rent later that may be unfinanceable for the leasehold,” which can lead to defaults, restructurings, or litigation. Market and legal commentary on reset formulas makes the mechanism plain: when land is valued using low rates and highest-value comparables, the reset formula can overshoot the building’s economic capacity, consuming NOI and harming both leasehold investors and lenders.

Investor or developer in the leasehold position

From the leaseholder side, the headline benefit is capital efficiency: you can control a prime retail site without buying it, and you can often allocate capital into the building, tenant improvements, and operations where returns may be higher than land appreciation. This “quasi-ownership” dynamic is a core reason ground leases are designed to be transferable and financeable, with fewer restrictions on assignment and meaningful ability to mortgage the leasehold.

But the feasibility model must treat ground rent like embedded senior capital. Retail leasehold underwriting practice explicitly treats ground rent as a priority expense, and financeability guidance repeatedly stresses that term, renewals, and predictable rent are gating items for lenders. In practice, that means your levered return can look excellent in year one and become fragile in year eleven if CPI lookbacks begin, or at a rent reset date if the lease contains appraised-value mechanisms.

Leasehold investors also face accounting visibility constraints that have become more consequential for retailers over the last several years. Under ASC 842, guidance documents explain that lessees recognize a right-of-use asset and a lease liability for most leases at commencement, reflecting the obligation to make lease payments in exchange for use of the asset. That balance-sheet recognition can change covenant optics and how corporate tenants think about long-term ground lease obligations.

Finally, leasehold exit is not the same as fee-simple exit. Appraisal literature stresses that leasehold value is finite and that simplistic “sum of parts equals fee simple” assumptions can be wrong. For retail investors counting on a sale or recap, that is a reminder that remaining term, renewal certainty, assignment flexibility, and lender protections drive the buyer pool and pricing more than the physical building does.

Pricing and market reality checks for retail-ground-lease underwriting

Even if you underwrite the lease document flawlessly, you still operate inside a pricing environment shaped by interest rates, cap rates, and credit appetite. For context, the lowered the federal funds target range to 3.50%–3.75% on December 10, 2025, which matters because long-duration contractual income streams and net-lease assets are priced off competing yields and financing costs.

Net-lease retail cap rates and buyer behavior provide a rough “adjacent market” reference for ground leases because many investors compare the two. The reported that cap rates were largely unaffected during 2025 despite multiple rate cuts in the second half of the year and explicitly tied market sentiment to Federal Reserve signals for 2026. The same report provides a snapshot of market stability that is useful when thinking about exit assumptions for retail leaseholds and pricing expectations for leased-fee ground rent streams.

A different angle comes from public ground-lease market participants. describes typical ground leases as long-term with contractual base rent increases (fixed, CPI-based, or both), and it provides specific detail on CPI lookback timing and caps commonly used in its portfolio—a useful reference point for what “institutionalized” ground lease mechanics can look like in the current era.

This is where feasibility assumptions often need to be more conservative than teams expect. If you are underwriting a retail leasehold exit at a tight cap rate but assuming a ground rent path with meaningful future resets or uncapped indexation, your buyer will likely haircut value or require structural changes—because leasehold lenders and buyers typically price the worst plausible rent path, not the base case.

What “good” looks like and what usually kills deals

A high-quality retail ground lease opportunity tends to be defined less by the tenant name and more by the combination of (a) predictable, financeable rent mechanics and (b) a lease document that survives tenant distress without destroying collateral value. Put differently: you want a deal that a future lender will underwrite without needing heroic legal surgery.

The most consistently cited “good” features across lender and industry guidance include: a term that extends well beyond loan maturity; clear rights to mortgage and assign; lender notice and cure provisions; “new lease” rights or functional equivalents; restrictions on amendments or terminations without lender consent; and predictable rent (fixed or predictably indexed, ideally with meaningful caps and clear calculation).

The red flags are equally consistent:

• Hard-to-model rent resets tied to appraised land value without strong guardrails, especially where highest-and-best-use assumptions can diverge from the permitted use under the lease.

• Termination risk that is not meaningfully mitigated by leasehold mortgagee protections (because collateral can vanish upon lease termination).

• Short remaining term or renewal options that are not clearly exercisable by lenders, which lender guidance flags as a problem for loan recovery horizons.

• Tight use clauses that restrict re-tenanting or repositioning if a retail concept fails, undermining lender and buyer flexibility.

• Outparcel control gaps (access, parking, signage, reciprocal easements) that make the “retail box” look clean but leave the site economically dependent on another owner’s cooperation.

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On the accounting and corporate-tenant side, remember that long-term ground leases may be viewed differently today than a decade ago because lease obligations are more visible on balance sheets. ASC 842 guidance explains that lessees recognize lease liabilities and right-of-use assets for most leases, which can influence retailer behavior on term length, escalations, and renewal certainty even when store performance is strong.

A useful closing mental model is this: a retail ground lease is a contract designed to last longer than the retail concepts that will occupy it. Your job in evaluating it is to verify that the contract is (1) financeable across cycles, (2) adaptable across retail formats, and (3) still economically viable under the contract’s rent path, not merely under your base-case NOI. Industry education and lender guidance converge on that theme—from the mechanics of cure rights and new leases, to the insistence on term and predictability, to the explicit warning that certain reset structures can destroy the leasehold’s ability to function.