Ground Leases, Explained — the Purest Structure in Net Lease
Dwaine Clarke · NNN Deal Finder / GCT Commercial
Published July 16, 2026
A ground lease is net lease reduced to its essence: you own dirt, the tenant owns everything standing on it, and rent arrives with no operating strings attached. It’s the structure behind the tightest caps in the market — McDonald’s and Chick-fil-A built their real estate empires on it.
The anatomy
Terms run long — 20-year bases with option chains stretching 40+ years total. Obligations are absolute-net by construction: the tenant built the improvements, so taxes, insurance, maintenance, and capital items never reach you. Escalations typically step 10% per five years, continuing through options. And at final expiration, improvements revert to the landowner (see FAQ) — a terminal-value kicker unique to the structure.
Why caps run lowest here
Stack the risk reductions: corporate credit (ground-lease tenants skew investment-grade), zero landlord capex forever, land under a proven operating business, and reversion optionality. What’s left to price is essentially credit duration and the corner’s quality. That’s why a McDonald’s ground lease trades inside almost everything else in retail — the yield is small because the risk inventory is smaller.
Subordinated versus unsubordinated
The one technical fork that matters. Unsubordinated (the overwhelming standard in single-tenant deals): your land sits senior to the tenant’s construction financing — if their lender forecloses, it inherits a tenant’s obligations to you. Subordinated: you’ve pledged your fee interest behind their loan, taking real capital risk for what had better be substantially higher rent. Rule of thumb for passive buyers: if the word subordinated appears, so should your attorney.
Underwriting the dirt
With no building to inspect, diligence concentrates: corner quality and access (the tenant’s own site-selection logic is your comp), rent versus land-residual math (what would this parcel command if re-ground-leased today?), option chain and escalation cadence, and the reversion clause. The classic mistake is treating low cap as low analysis — a 4.1% yield leaves no pricing room for a corner the traffic pattern is abandoning. Land is the security; underwrite it like a lender would.