Ground lease arrangements have become increasingly popular financing tools for commercial real estate development projects. These structures allow developers to control and improve property without the substantial capital outlay required for outright acquisition. For property owners, ground leases provide steady income while maintaining ownership of the underlying asset. Kansas City attorney James Neeld has structured numerous ground lease agreements for development projects across the Midwest, bringing expertise in balancing landowner and developer interests.

Fixed vs. Percentage Rent Structures

When structuring a ground lease, one of the most critical considerations is the rent payment methodology. Developers and landowners typically choose between fixed rent structures and percentage rent arrangements, each offering distinct advantages depending on the project scope.

Fixed rent structures provide predictability for both parties. The developer knows exactly what their land costs will be over time, facilitating accurate pro forma analyses and financing applications. For landowners, fixed rents guarantee a steady income stream regardless of the development’s performance. Many ground leases incorporate scheduled rent increases, either through predetermined step-ups or inflation-indexed adjustments.

“Fixed rent structures provide the predictability that lenders prefer when financing development projects,” notes James Neeld, Kansas City attorney specializing in commercial real estate transactions. “However, these arrangements may leave landowners without participation in a project’s upside potential.”

Percentage rent structures, by contrast, allow landowners to share in the success of the development. These arrangements typically include a base rent plus a percentage of gross revenues generated by the property. This approach aligns the interests of both parties, incentivizing landowners to support the project’s success while providing developers with potentially lower initial costs.

Hybrid approaches have gained popularity in recent years. These structures incorporate a lower fixed base rent with percentage components that kick in once certain performance thresholds are achieved. This compromise provides some income security for landowners while allowing them participation in successful developments.

Term and Renewal Provisions

Ground lease terms typically span decades, with initial periods of 30 to 99 years being common. The extended timeframe reflects the substantial investment developers make in improvements and the time required to achieve adequate returns.

“For major development projects, lease terms must be sufficiently long to justify the capital investment,” explains James Neeld. “Developers need assurance that they’ll control the property long enough to realize the full economic potential of their improvements.”

Renewal options represent another critical component of ground lease structures. These provisions outline the conditions under which the tenant may extend the lease beyond its initial term. Renewal options typically specify:

• Number of renewal periods permitted
• Length of each renewal period
• Method for determining rent during renewal periods
• Notification requirements for exercising options
• Conditions that must be satisfied before renewal rights can be exercised

Rent reset provisions during renewal periods deserve particular attention. Some ground leases specify formula-based adjustments, while others require new appraisals to establish fair market value for the renewal term. The methodology selected can dramatically impact the economics of the overall deal, particularly for development projects with long-term horizons.

Financing Considerations

Securing financing for ground leased development projects presents unique challenges. Lenders carefully evaluate how the ground lease terms might affect the property’s value and the borrower’s ability to service debt.

Leasehold mortgages—where the tenant’s leasehold interest serves as collateral—typically require specific provisions in the ground lease to protect lenders. These include:

• Lender notice and cure rights for tenant defaults
• Recognition agreements ensuring the lender’s right to assume the lease
• Non-disturbance provisions preventing lease termination upon foreclosure
• Extended cure periods for defaults requiring possession
• Clear parameters for transferring the lease to qualified purchasers

“Financeable ground leases require careful balancing of landowner and lender interests,” observes James Neeld, who has structured numerous agreements for Kansas City development projects. “Without proper protections for lenders, developers may find financing costs prohibitively expensive or financing entirely unavailable.”

Subordination represents another critical financing consideration. Most institutional lenders prefer fee simple collateral, creating tension with landowners who resist subordinating their fee interest to a leasehold mortgage. Creative compromises, such as subordinating only specific parcels or incorporating protective conditions, can bridge this gap.

Default and Remedy Provisions

Comprehensive default and remedy provisions form the foundation of any well-structured ground lease. These clauses define what constitutes a default, establish cure periods, and outline available remedies for the non-defaulting party.

Default provisions typically address:

• Monetary defaults (failure to pay rent or other required payments)
• Non-monetary defaults (failure to maintain insurance, violation of use restrictions)
• Material vs. non-material breaches
• Repeated defaults and their consequences
• Force majeure considerations

Remedy provisions must balance the landowner’s interest in protecting their asset with the developer’s substantial investment in improvements. Rather than immediate termination rights, well-structured ground leases often include graduated remedies:

• Notice and cure opportunities before more severe remedies can be exercised
• Step-in rights allowing temporary performance by the landowner
• Specific performance remedies for non-monetary defaults
• Liquidated damages provisions for quantifiable breaches
• Termination as a remedy of last resort

“Termination represents a draconian remedy that often fails to serve either party’s interests,” James Neeld explains. “For development projects with substantial improvements, more nuanced remedy structures typically provide better outcomes.”

Ongoing reporting and monitoring requirements can help identify potential defaults before they materialize. Regular financial reporting, property inspections, and compliance certifications allow parties to address issues proactively rather than reactively.

Conclusion

Ground lease structures offer flexible frameworks for development projects when fee simple acquisition isn’t feasible or desirable. The careful balance of fixed and percentage rent components, appropriate term and renewal provisions, financing-friendly clauses, and measured default remedies can create arrangements that serve both landowners and developers effectively.

As James Neeld has demonstrated through his work with Kansas City development projects, thoughtfully structured ground leases can unlock development opportunities while preserving landowner interests. By addressing key considerations proactively, stakeholders can establish relationships that withstand the inevitable challenges of long-term real estate ventures.