January 10, 2026 · By Mariusz Kurylo · CRE Collapse

The Ground Lease Trap: How a Once-Obscure Structure Is Amplifying CRE Losses

Published: January 10, 2026 | By Mariusz Kurylo

Among the more technical but increasingly consequential features of the current commercial real estate crisis is the role of ground leases — a property ownership structure that was historically obscure outside of major urban real estate circles but has become a significant amplifier of CRE distress in the current downturn. Ground leases separate ownership of the land beneath a commercial building from ownership of the building itself: a ground lessor owns the land and receives annual ground rent from a ground lessee who owns (or developed) the building. The ground lessee essentially rents the right to use the land in perpetuity — or for a very long term, typically 50–99 years — while building and operating the structure above.

This structure was revived and modernized by institutional investors starting in the mid-2010s as a way to recycle capital efficiently. Institutions with very long time horizons — endowments, sovereign wealth funds, certain insurance companies — found that owning the land position in high-quality commercial real estate offered a compelling risk-return profile: secure, inflation-linked income with no management responsibility, backed by real property that would always have some value. The ground lessee got access to expensive urban land without deploying the full land purchase price as equity, reducing the total capital required to develop a commercial project.

Why Ground Leases Are Causing Problems Now

The problems with ground leases in the current market are concentrated in buildings that were developed or acquired near the peak of the 2019–2022 cycle with ground lease rent structures calibrated to peak valuations. A ground lease typically requires the ground lessee — the building owner — to pay annual ground rent equal to a percentage of the underlying land value, often reset periodically to market. In peak 2021 conditions, ground rent for a major urban commercial property might be calibrated to a land value that accounted for 20–30% of the total property value.

As commercial property values have declined 30–50% for office and retail, the fixed ground rent obligation has become an increasingly large percentage of the building's NOI. A building that earned $8 million in NOI in 2021 and paid $2 million in ground rent had a net income available for debt service and equity of $6 million — a reasonable coverage ratio. If that building's NOI declines to $5 million in 2025 from vacancies and below-market renewals, the $2 million ground rent payment consumes 40% of income rather than 25% — a material deterioration in debt service coverage that happens through no fault of the financing, purely from the fixed obligation structure.

Bloomberg documented this dynamic extensively in a 2025 analysis of New York City commercial properties with outstanding ground leases. The analysis found that ground-leased commercial buildings were experiencing financial stress at lower vacancy rates than fee-simple buildings (those where the owner holds both land and building) precisely because the fixed ground rent acted as operating leverage — amplifying the financial impact of revenue declines. Buildings with ground rents representing 20–25% of NOI at underwriting were, with moderate NOI declines, showing ground rent coverage below 1.0x — a condition that typically triggers technical default under the ground lease terms.

The Foreclosure Complexity

When a ground-leased commercial property enters financial distress, the resolution process is substantially more complex than for fee-simple properties. The ground lease creates two separate estates — the leasehold interest (building and the right to occupy the land) held by the building owner, and the fee interest (the land) held by the ground lessor — and any foreclosure or workout must address both.

A lender who forecloses on the leasehold mortgage (the loan secured by the building owner's interest) acquires only the leasehold — the right to occupy the land for the remaining ground lease term, subject to continuing ground rent payment obligations. If the lender then wants to sell the property, any buyer must assume the ongoing ground rent obligation, which reduces the market's willingness to pay for the asset and narrows the buyer universe to those who understand and are willing to underwrite ground lease structures.

Reuters reported that several lenders who had foreclosed on leasehold mortgages in 2024 had discovered that their REO assets were functionally unmarketable at prices that would allow them to recover their loan balances, precisely because the ground rent obligations made the buildings economically unviable for most prospective buyers at any price that worked for the lender. In these situations, the only viable path was frequently a negotiated restructuring with the ground lessor — who held the ultimate leverage by virtue of owning the land — or outright surrender of the leasehold in exchange for elimination of the ground rent obligation.

The iStar / Saul Centers Model Under Scrutiny

The institutionalization of the modern ground lease structure was driven primarily by iStar (subsequently renamed Istar), which created and marketed what it called "ground lease 2.0" — a standardized institutional ground lease product that it assembled into a publicly traded REIT called Saul Centers and later a dedicated vehicle called Safety, Income & Growth (SAFE). The thesis was that modernized, standardized ground leases offered the risk-return characteristics of investment-grade bonds with the inflation protection of real property.

The product worked as designed during the appreciation cycle: ground lessor income grew as land values rose, and the separation of land from building protected the ground lessor from building-level vacancies and financing stress. The Wall Street Journal analysis of SAFE's portfolio performance through 2024 showed that the ground lessor position had indeed outperformed building-level investments on a volatility-adjusted basis — precisely because the building's problems did not flow through to the land owner.

But the scale of the current building-level distress was testing the product's resilience at the edges. When building owners across a significant share of SAFE's portfolio were in financial difficulty simultaneously, the option value embedded in ground leases — the ground lessor's right to recover the building at lease termination or in default scenarios — created complex governance questions that had not been thoroughly stress-tested in the original product design.

Investors Stepping Back from Ground Lease Structures

The practical effect of the ground lease complexity in workouts was a reassessment by lenders and investors of the risk profile of leasehold properties. Commercial mortgage lenders who had been comfortable making leasehold loans on institutional-quality ground-leased properties in 2019–2021 became significantly more cautious by 2024–2025, either declining to lend against leasehold interests entirely or requiring substantially lower LTV ratios (50–55% versus the 65–70% typical for fee-simple buildings) to compensate for the additional workout complexity.

This credit tightening for leasehold properties reduced the refinancing options available to building owners facing maturing debt and created a selection effect: the buildings most likely to succeed in ground-leased structures going forward were those with the strongest NOI and most stable tenant bases — precisely the properties that could probably have been financed on simpler fee-simple terms.

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Sources: Bloomberg, Reuters, The Wall Street Journal, Financial Times, CBRE

Disclaimer: This article is for informational and educational purposes only. It does not constitute financial, legal, or investment advice.