Making Sure The Ground Tenant Builds

Once the building on a ground-leased property is completed, the ground landlord has a very secure rent stream. While the rent under the ground lease is based on the value of the unimproved land, if the ground tenant defaults and the tenant's lender does not step up and cure the default, the landlord's remedy is to terminate the lease and to retain ownership of the land and the building free and clear of the tenant's interest, which would typically far exceed the value of the land. As a result, ground lease defaults are few and far apart.

But what about the period before the building is built? During this period, the landlord's interest is far less secure. The tenant in most instances will be a single-purpose entity with no material assets other than its interest under the ground lease. At that point, if the tenant were to default, the landlord's remedy would be to terminate the lease and recover possession of the land. This might entail drawn-out litigation with the