Understanding fee simple ownership, ground leases and leasehold interests in commercial real estate

Commercial real estate ownership structure can shape everything from financing and valuation to investor demand and exit strategy. Yet terms like fee simple ownership, ground lease and leasehold interest are often misunderstood, especially by newer investors or those evaluating unfamiliar deal structures.

While these concepts are legal in nature, their impact is practical. Ownership structure affects who controls the land, who controls the building, how income is generated and how buyers and lenders evaluate risk.

Whether you’re acquiring a commercial asset, financing a redevelopment or reviewing an offering memorandum, understanding these distinctions can help you better evaluate a property and make more informed investment decisions.

What is fee simple ownership?

Fee simple ownership is the most complete form of real estate ownership.

In a fee simple structure, the owner holds title to both:

• The land itself
   
• Any improvements built on the land, including buildings, parking lots and site improvements

This is what most investors think of as traditional property ownership.

Because the owner controls both the land and improvements, fee simple ownership typically offers the greatest flexibility. Owners can lease, sell, redevelop or finance the property subject to zoning, easements or other legal restrictions.

Fee simple ownership is common across nearly every commercial real estate asset class, including multifamily, industrial, healthcare and retail.

For many investors, fee simple ownership is attractive because it offers full control of the asset and long-term appreciation potential tied to both the land and the improvements.

What is a ground lease?

A ground lease is a long-term lease in which one party owns the land and leases it to another party, often for decades.

The tenant, known as the ground lessee, has the right to use the land and may develop or operate improvements on the property while paying rent to the landowner.

Ground leases are especially common across retail investments, particularly:

• Retail pad sites
   
• Quick-service restaurant developments
   
• Hospitality
   
• Mixed-use developments
   
• Dense urban markets where landowners want to retain ownership of the land

A common example is a restaurant operator who builds on land leased from a separate owner. The operator controls the building and business operations, while the landowner collects rent on the land itself.

Ground leases terms vary widely, but many run 30 to 99 years and may include scheduled rent escalations, renewal options and provisions governing what happens to the improvements when the lease expires.

For landowners, ground leases can create long-term income while preserving ownership of the underlying real estate.

For developers or operators, ground leases can reduce upfront acquisition costs by eliminating the need to purchase the land.

What is a leasehold property?

A leasehold property refers to a property where the occupant or investor controls the improvements through a lease rather than owning the land outright.

This ownership position is called a leasehold interest or leasehold estate.

In a leasehold structure:

• The landowner owns the land
   
• The leasehold owner controls the improvements during the lease term

The leasehold interest can often be sold, assigned or financed separately from the land, depending on the lease agreement.

Because ownership rights are tied to the remaining lease term, leasehold investments are often evaluated differently than fee simple assets.

This becomes especially important when investors analyze long-term value, financing options and exit strategy.

At the end of the lease term, ownership or control of the improvements may revert to the landowner depending on the structure of the lease.

Fee simple vs. leasehold: What’s the difference

The biggest difference between fee simple and leasehold is ownership of the land.

With fee simple ownership, the investor owns both the land and the building.

With a leasehold structure, the investor controls the building or improvements but leases the land from another party.

That distinction can affect:

• Financing options
   
• Property valuation
   
• Investor demand
   
• Tax treatment
   
• Long-term appreciation potential
   
• Resale strategy

Leasehold opportunities can sometimes offer a lower cost basis than comparable fee simple investments, but buyers are typically more sensitive to lease terms and remaining duration.

Fee simple assets generally offer broader marketability because ownership rights are permanent and not tied to a lease expiration.

Ground lease vs. fee simple ownership

When comparing ground lease versus fee simple ownership, neither structure is inherently better. The right fit depends on investor goals, capital strategy and risk tolerance.

Fee simple ownership often offers:

• Full control over land and improvements
   
• Broader financial flexibility
   
• Stronger long-term appreciation potential
   
• Greater redevelopment flexibility

Ground lease ownership often offers:

• Lower operational responsibility for landowners
   
• Stable passive income streams
   
• Lower cost basis for developers or occupiers
   
• Opportunities to unlock capital while retaining land ownership

In the net lease market, ground lease investments are often viewed as relatively secure because the landowner collects rent while often having limited day-to-day property responsibilities.

That said, ground leases are not risk-free.

Factors like tenant default, below-market or above-market rent, limited rent growth and end-of-term building condition can all influence performance and value.

How ownership structure impacts value, financing and investor demand

Ownership structure can materially affect how a property is priced, financed and perceived by buyers.

For investors evaluating commercial real estate, the distinction between fee simple, ground lease and leasehold is not just legal. It directly shapes risk, return and long-term flexibility.

Investor demand and pricing

Fee simple assets typically attract the broadest buyer pool because ownership rights are straightforward: the investor owns both the land and the improvements.

Ground lease investments are often viewed differently. In the net lease market, many investors see ground leases as highly stable, passive investments. The landowner collects rent on the land itself while often having little or no responsibility for building repairs, maintenance or operations. Because of that passive income profile, ground lease deals often trade at lower cap rates than comparable fee simple assets.

That perception can create strong demand, but it can also lead to oversimplification.

Ground leases are often viewed as lower risk, but they are not risk-free. Investors still face exposure tied to tenant credit, limited rent growth, lease structure and what happens to the improvements at the end of the lease term. Depending on the property, future costs related to repositioning, demolition or obsolescence can become part of the investment equation.

Leasehold interests are often viewed as the less desirable position because the investor controls the property for a finite period rather than in perpetuity. But that doesn’t mean leasehold ownership is inherently weaker.

In some cases, a leasehold investor with a long-term ground lease and below-market or nominal ground rent may be in a very strong position economically.

Why lease economics matter

One of the most overlooked considerations in a ground lease structure is the relationship between ground rent and leasehold rent.

When ground rent is above market, it can reduce the amount a tenant is willing to pay toward occupancy overall. That can place more of the economic value in the ground lease position and compress value on the leasehold side.

When ground rent is below market, the opposite can happen, with more value shifting to the leasehold interest.

For buyers evaluating either position, understanding how those economics interact is just as important as understanding who owns the land.

Financing considerations

Ownership structure also has a meaningful impact on financing.

Fee simple ownership generally offers the broadest financing flexibility because the lender can underwrite both the land and the improvements as collateral.

Ground lease and leasehold transactions often require deeper review of:

• Remaining lease term
   
• Renewal options
   
• Rent escalations
   
• Leasehold financing rights
   
• Whether the ground lease is subordinated or unsubordinated

For leasehold properties in particular, remaining lease term can be one of the most important underwriting factors.

Many lenders require that the ground lease extend well beyond the loan term. As that remaining term shortens, financing options can become more limited. That can narrow the buyer pool over time, especially as certain lending sources step back and acquisition financing becomes harder to secure.

For many investors, the lease term itself becomes just as important as the physical real estate.

Tax considerations

Ownership structure can also affect tax treatment.

Fee simple investors may be able to depreciate the value associated with the improvements.

Ground lease investors typically own only the land, which is generally non-depreciable. That means they may not receive the same depreciation benefits as a fee simple owner.

Leasehold investors may benefit from depreciation tied to the improvements they control, which can make the structure attractive depending on the investment strategy.

These differences can shape buyer demand. For example, investors focused on stable passive income may view ground leases favorably, while investors prioritizing depreciation may see more value in fee simple or leasehold ownership.

Why ground leases are getting more attention today

Ground leases have long been part of commercial real estate, particularly in retail and net lease, but many market participants see them gaining more attention in today’s environment.

Tighter capital markets have made ownership structure a more active part of deal strategy.

For some investors, ground lease assets offer predictable income and a relatively passive ownership profile.

For some owners, separating the land from the improvements can create liquidity by unlocking capital tied up in the land while maintaining operational control of the building. This can overlap with broader sale leaseback strategies used to unlock capital while maintaining operational control of real estate.

That structure can support recapitalization, reduce leverage or free up capital for other investments without requiring a full disposition.

As the capital markets remain selective, more investors and owners are taking a closer look at ground lease structures not just as a niche ownership format, but as a strategic tool within the capital stack.

Why investors should pay attention to ownership structure before buying

Ownership structure is often summarized in just a few words on a listing or offering memorandum, but it can have a significant impact on a property’s economics.

Before acquiring any commercial asset, investors should understand:

• Who owns the land?
   
• Who owns or controls the improvements?
   
• How much lease term remains?
   
• Are renewal options available?
   
• How does the structure affect financing?
   
• What happens when the lease expires?
   
• How might ownership structure affect resale value or buyer demand later?

These questions can materially change how an opportunity is priced, financed and ultimately executed.

Final thoughts

Understanding commercial real estate ownership structures starts with understanding the difference between fee simple ownership, ground leases and leasehold interests.

Each structure offers different benefits, tradeoffs and risks depending on the property, lease terms and investor objectives.

Fee simple ownership may offer the most control and flexibility. Ground leases can provide stable long-term income or lower barriers to entry. Leasehold interests can create unique investment opportunities, but often require deeper analysis around term, financing and exit strategy.

For investors, owners and developers, understanding how ownership structure affects value, financing and long-term strategy can lead to better decisions and stronger outcomes.

Whether evaluating a fee simple acquisition, a ground lease opportunity or a leasehold interest, ownership structure often plays a central role in pricing, financing and long-term value creation. Northmarq’s net lease and sale leaseback experts can help clients evaluate these considerations across acquisitions, dispositions and broader capital planning.

In commercial real estate, structure is never just paperwork. It can shape the economics of the deal from acquisition through disposition.