What is a ground lease, and how does it differ from ordinary real estate ownership?
A ground lease separates land ownership from building ownership. The landowner retains title to the land and leases it to a tenant, typically for a term running decades or even a century. The tenant funds construction or improvements on the land and holds title to the building for the lease term, paying periodic ground rent to the landowner. The fundamental difference from ordinary real estate ownership is that ordinary ownership bundles land and building into a single title, while a ground lease splits the same parcel into two distinct interests held by two different parties.
That split carries a consequence that matters specifically for tokenization: if you buy a token representing only the building, you do not own the land, and unless the agreement includes a renewal or purchase option, the building typically reverts to or is acquired by the landowner when the lease term ends, zeroing out the tenant's interest. Conversely, if you buy a token representing the landowner's retained ground rent stream, what you receive is a rental cash flow, not the operating income of the building — the two carry entirely different risk and return profiles.
Ground leases further split into subordinated and unsubordinated forms. A subordinated ground lease lets the tenant pledge the building as collateral for a construction or improvement loan, with the landowner's claim ranking behind the lender's in a default. An unsubordinated ground lease reverses this, keeping the landowner's interest in the land senior to any building-level debt. This ranking directly determines where a token holder actually stands in a default scenario when this asset class is tokenized.
Why does the ground lease structure exist, and what problem does it solve?
The core motivation is capital efficiency. Land is typically the most expensive component of a development with relatively limited appreciation potential, and buying it outright ties up a large amount of capital indefinitely, unlike the building, which can generate ongoing cash flow through operations to pay back what was invested in it. A ground lease lets a developer or operator avoid paying for the land outright, instead paying periodic ground rent, freeing up capital that would otherwise be locked in land to put into developing the building itself. This is especially attractive to industries that need to open many dispersed locations quickly, such as retail chains and telecommunications infrastructure — leasing the land under each site beats buying it outright at every one.
For the landowner, a ground lease delivers stable, long-term rental income, usually with inflation-adjustment provisions, while retaining ultimate control over the land's disposition once the term ends, without bearing the risk of developing or operating the building itself — that risk stays with the tenant. This division of risk pushes the landowner's role closer to that of a fixed-income investor, while the tenant takes on operating and development risk closer to that of an equity investor.
The motivation for tokenizing this structure is to package ground rent, an income stream that behaves much like fixed income with predictable cash flow, into divisible, tradable tokens, opening up long-term ground rent income that has historically been accessible mainly to large institutions to smaller investors participating in fractions.
How does a ground lease actually work, and what key provisions does the agreement contain?
The typical workflow: the landowner and tenant sign a long-term lease specifying the ground rent (usually adjusted by an inflation index or periodic renegotiation), the lease term, and how the building will be handled once the term ends. The tenant obtains the right to use the land, funds development or improvement of the building at its own cost, and pays ground rent plus its own development costs out of the operating income the building generates, such as rental or business revenue, during the lease term.
Several provisions in the agreement determine this asset's actual risk profile.
Reversion terms specify whether the building reverts to the landowner at expiration, whether the tenant can renew, or whether the tenant holds a right of first refusal to purchase the land — the three arrangements produce fundamentally different outcomes for what a tenant, or a token holder, ultimately gets back.
Subordination terms determine whether the tenant can pledge the building for a bank loan and whether the landowner's claim ranks ahead of or behind that lender, directly affecting the actual margin of safety on the landowner side's income.
Renegotiation mechanics determine how often ground rent is reassessed and against what benchmark, which decides whether the landowner side's income is fixed or floats with market conditions.
When tokenizing this structure, issuers typically split the ground rent income right and the building operating right into two separate tokens, because their cash flow characteristics, risk levels, and outcomes at lease expiration are entirely different — bundling them together would leave a token holder unclear about which risk they actually hold.
What should an investor actually check before buying a tokenized ground lease asset?
First, confirm whether the token represents the ground rent income right or the building operating right — these are entirely different assets. Ground rent income behaves like fixed income: low volatility, limited upside. Building operating rights behave like equity: returns track the building's operating performance but can go to zero at lease expiration depending on renewal and renegotiation terms.
Second, check how much of the lease term remains and exactly how the reversion clause is worded. A building operating token with ten years left on the lease and one with eighty years left carry wildly different actual value even at the same headline rental yield — this expiration-driven zeroing risk is unique to ground lease assets and does not exist in ordinary real estate ownership, so remaining term must be built into any valuation.
Third, confirm the claim ranking between the landowner side and the tenant side. Check clearly whether the lease is subordinated or unsubordinated, which determines exactly where a token holder ranks if the tenant defaults and the building is foreclosed or liquidated.
Fourth, look at how the renegotiation mechanism is designed. If ground rent is a fixed amount with no inflation adjustment, the landowner side's real income erodes over time; if the renegotiation benchmark is vague and left to bilateral negotiation, there is a risk of deadlock or dispute. The more specific and objectively indexed these provisions are, the more predictable the tokenized income becomes.
U.S. telecommunications infrastructure operator American Tower is a public illustration of the ground lease structure: roughly seventy percent of its domestic cell tower sites secure land rights through ground leases rather than outright purchase, involving more than thirty-five thousand landowners with an average remaining lease term of about twenty-eight years. This structure lets American Tower deploy towers across a large number of dispersed sites nationwide with relatively little capital, rather than buying the land under every single site.
The value of splitting land from building in a ground lease is that it frees the developer from locking up large sums in land while giving the landowner stable, long-term income, with each side bearing the risk that matches its role. The cost is that this split itself creates a zeroing risk at lease expiration that does not exist in ordinary fee-simple ownership. Once tokenized, a holder who has not clearly distinguished whether they bought the ground rent income right or the building operating right, and how much lease term remains, can easily end up treating a gradually depreciating interest as a stable asset.