Ground Lease Basics for REPE Interviews

Ground leases separate ownership of land from ownership of the improvements. They show up in urban office, mixed-use, and some hospitality deals. If you treat a leasehold like fee simple, your cap rate and exit story are wrong, and interviewers will catch it in one follow-up.

The short answer

"A ground lease means the building owner leases the land from a ground lessor for a long term, paying ground rent. The investor often owns the leasehold interest in the improvements, not the land fee. Valuation must reflect ground rent, remaining term, reset provisions, and financing friction. Leasehold interests usually price to higher yields than comparable fee simple assets, all else equal, because the cash flow is burdened and the residual interest is constrained."

Core pieces

Know who has leverage at reset and at expiry. That is where value migrates.

Why it changes underwriting

Resets and documents that matter

Interviewers love reset mechanics. Fixed bumps are easier to underwrite than resets to a percent of land value or fair market rent. A reset that re-marks to land value can crush leasehold NOI just when you hoped to exit. Read:

• Remaining term and extension options
• Reset formula and frequency
• Who pays for structural CapEx and insurance nuances
• Estoppel and SNDA practicality for lenders
• Purchase options or rights of first offer, if any

If the CIM is quiet on resets, that silence is a diligence flag, not comfort.

Financing and capital stack

Leasehold financing is a market of its own. Some lenders will not touch short remaining terms. Others price wider spreads. Preferred equity and mezz can fill gaps but add complexity. Pair this topic with Preferred Equity and Mezz in RE and Refi Risk when you discuss exit and refinance paths.

A strong ground lease from a creditworthy lessor with long term and mild resets can still be financeable. A weak one turns your "core-ish" yield into a story deal. Say which you are underwriting.

Compare: fee simple vs leasehold interview answers

Risks to name without prompting

1. Rent resets to market land value
2. Refi constraints as term shortens
3. Improvement reversion or expensive extension negotiations
4. Subordination issues between lease and mortgage
5. Smaller exit buyer pool and appraisal friction
6. CapEx misallocation between lessor and lessee obligations

30-second verbal

"Ground lease deals require modeling ground rent and remaining term, not only building NOI. I diligence reset formulas, extension options, and lender appetite. I assume a wider exit yield than fee simple unless the lease terms are unusually strong and long, and I stress refinance risk as expiry approaches."

Diligence questions you can ask in the room

• How many years remain, including options you believe are exercisable?
• What is the next reset, and what is the formula?
• What LTV and DSCR did recent leasehold comps clear?
• Who owns the land, and how hard are they to negotiate with?
• What happens to improvements at expiry under the documents?

Practice

On Project Meridian, force yourself to subtract ground rent and widen exit yield, then narrate how levered returns move. If your IRR only works at a fee-simple exit cap, you do not have a leasehold deal, you have a hope.

Interview follow-ups to expect

Be ready for: would you pay the same cap rate as a fee building next door? Answer no, unless lease terms neutralize the difference, and quantify the rent drag and exit yield gap in your returns.

Related

Use Cap Rate Sensitivity to show how a 50 bps wider exit yield hits equity returns, and keep refi risk language ready for hold-year five conversations.