Ground Lease: Operating Expense Obligations for Land Landlords
In a ground lease, the tenant constructs and owns the building while the landlord owns the land. Operating expense obligations and CAM requirements depend on the lease structure — net ground leases vs. participating ground leases.
Last updated: March 2026
Definition
A ground lease is a long-term lease (typically 50–99 years) where the landowner leases land to a tenant who constructs and owns the building — with the building reverting to the landowner at lease expiration.
CAM Reconciliation at a Glance
| Attribute | Ground Lease |
|---|---|
| CAM Included in Lease | No (typically) |
| Annual Reconciliation Required | No (see notes) |
| Gross-Up Applicable | Not typically |
| CAM Caps Applicable | Not typically |
| Common Property Types | retail pads, fast food, gas stations, net-leased single-tenant retail, mixed-use development, institutional real estate |
Who Bears Operating Expenses
In a standard net ground lease: tenant bears all operating expenses for the building they own — property taxes on improvements, insurance, maintenance, and all operating costs. The ground lease rent is paid to the landowner for use of the land only.
CAM Reconciliation Notes
Standard net ground leases do not require CAM reconciliation — the tenant owns the building and bears all building expenses directly. However, some ground leases (particularly in retail and mixed-use) include participating rent provisions or expense participation clauses that create reconciliation obligations. Additionally, any sub-leases the building tenant enters with occupants are subject to CAM reconciliation under those sub-leases.
Formulas
Ground Lease Rent
Ground Rent = Land Value × Capitalization Rate (or Fixed Rent per Lease Terms)
| Variable | Definition |
|---|---|
| Land Value | Fair market value of the land at commencement |
| Capitalization Rate | Agreed return rate — typically 6–8% on institutional ground leases |
Worked Example
A retail pad site (1 acre) is ground-leased to a fast food operator. Land value: $800,000. Ground rent rate: 7%. Annual ground rent: $56,000/year. The tenant constructs a 3,000 SF building, owns it, and is responsible for all building operating expenses, property taxes on the improvements, insurance, and maintenance. The landowner receives only the $56,000 annual rent with no CAM reconciliation.
Landlord Risks Under This Lease Type
Building reversion value risk — the landowner has limited control over how the building is maintained during the lease term
Participating rent disputes if the ground lease includes a percentage of tenant revenues
Property tax assessment complexity when improvements and land are owned and assessed separately
Common Reconciliation Mistakes
- Land landlords attempting to pass through building operating expenses — in a net ground lease, the tenant owns the building and all expenses are theirs
- Failing to specify in the ground lease who bears property taxes on the land vs. improvements (often assessed separately)
- Not reconciling participating rent components when the ground lease includes them
Frequently Asked Questions
Who pays operating expenses in a ground lease?
In a standard net ground lease, the tenant who owns the building pays all building operating expenses — property taxes on improvements, insurance, utilities, maintenance, and all other costs. The landowner receives only the ground rent for use of the land. The landowner typically has no CAM reconciliation obligations under a pure net ground lease.
Does a ground lease require CAM reconciliation?
Standard net ground leases do not require CAM reconciliation from the landowner's perspective — the building tenant bears all operating expenses directly. However, if the ground lease includes participating rent provisions, the landowner may need to reconcile percentage rent based on tenant revenues. Additionally, if the building tenant sub-leases space to occupants, those sub-leases are subject to CAM reconciliation under their own terms.
Free Calculators for This Lease Type
Related Resources
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