A Look at Ground Leases in Real Estate

 

There's an interesting real estate arrangement that you may not have heard about if you aren’t active in the commercial real estate business: ground leases.

So what exactly is a ground lease? A ground lease is when a land owner leases their property for a period of time to a tenant in order for the tenant to develop and build on the land. After the lease period ends, all developments and improvements are turned over to the landowner. These arrangements allow property owners to retain ownership of a property while generating income and revenue from the land without assuming responsibility for construction, maintenance or repairs. Tenants also benefit, as not purchasing the land helps significantly reduce upfront costs, and may allow them access to prime locations that would be difficult to obtain otherwise.  Not surprisingly, in addition to holding on to prime real estate, a property owner may also choose to offer a ground lease to avoid capital gain taxes they would have to pay if they sold the property instead. Similarly, tenants may also have tax incentives to choose a ground lease, as rental payments may be fully deductible, whereas principal payments under a loan would not be. Ground leases are most common in the commercial space, where lease terms can last as long as 99 years in many states. They are commonly used by franchises where a corporate headquarters will purchase the land and then lease it to franchise owners to construct and use the facility. Other national chains, such as Macy’s and Nordstrom , also have many of their locations under ground leases. The government has also used ground leases for special programs, nonprofits, or to encourage specific types of economic development.

When the lease ends When a ground lease expires, the land owner has the right to take the property and all improvements on it – leaving the tenant with nothing – or to change the lease terms altogether. Although ground leases are most common in commercial real estate, they have also been used for residential properties, often to make housing more affordable. However, as some recent examples demonstrate, the inevitability of an expiring lease means that affordability is only guaranteed for so long. Residents of a co-op in New York City are feeling the pressure of an expiring ground lease as the rental payment on their purchased homes is set to increase 450% , pending a ruling on the value of the land. The majority of residents will likely be priced out and lose all equity in their homes – many of which couldn’t even be sold within the last decade as banks stopped issuing mortgages for the property and home values dramatically decreased after the land was sold to a new investor who stated the site offered “unique future potential to construct a luxury retail, hotel and condominium tower.” Some residents feel the price hikes are a way to make that happen. Many condo owners in Hawaiʻi are also worried about expiring ground leases as they watch the value of their homes decline in real time. In 2022, Hawaii Business Magazine reported that 1 in 8 condos for sale on Oʻahu were under a ground lease, and many of them were listed at affordable prices the region hadn’t seen in a long time. However, those prices wouldn’t really matter for long as one listing stated, “this is a LEASEHOLD condo which you must surrender in July 2027.”  One 70-year-old resident of the NYC co-op summed up the situation succinctly, “Losing the equity is the least of my problems. It’s finding another place that I can afford at this point in my life.”

The AI Effect on Price of Electricity

 

	Regardless of the reasons behind electricity rate increases, one thing is for sure: Consumers aren’t happy about rising rates. So today, let’s take a look at how rates are changing and what may be contributing to it. How are rates changing? On average, electricity prices across the U.S. increased 6.5% from May 2024 to May 2025. Some of the hardest hit states include Utah (15.2%), Connecticut (18.4%), and Maine (36.3%), and many other states are in the process of implementing already approved rate increases including Oregon, Pennsylvania and New York. Other states, such as Arizona and North Dakota , are currently dealing with rate increase proposals that would increase electricity costs by more than 10% for the average resident. In contrast, the Alabama Public Service Commission voted last week to freeze some rates for the next two years to help stabilize prices. The impact of these new increases varies widely and may not be felt to the full extent right away, as companies often phase in increases over several years. For example, the average household in Western Pennsylvania will be paying about $10 more each month immediately, while North Carolina households will be paying up to $30 more a month by the year 2028 when the approved increase has fully rolled out. Increased demand, increased rates Our nation’s electrical infrastructure is full of aging equipment. This means electrical poles, towers, substations and wires have to be replaced in order to strengthen the grid and meet increasing demands for transmission (i.e. carrying electricity from one region to the next) and distribution (i.e. supplying electricity to customers). The cost for these upgrades is quite large, and COVID-era supply chain issues have made the required materials even more expensive than they were previously – “ in just five years, U.S. utilities increased their spending by $5 billion on transmission and another $16 billion on distribution.” The main reason why the electricity grid infrastructure has to be upgraded more quickly than in previous decades is the boom in AI data centers. This boom “has upended a utility industry that grew used to 20 years of no increase in electricity demand.” Even planned data centers that have not yet broken ground are impacting prices, as they’re factored directly into the demand projections that help determine rate increases for customers. This has some worried that a potential AI “bubble burst” could leave consumers paying for increased demand that is “overstated.”  Others are concerned of a “wealth transfer” from everyday consumers to the data center industry, at the same time that the industry’s huge demands could leave the grid less reliable for households and businesses, with a huge potential for blackouts. After all, some data center campuses are so large that they may require more electricity than entire cities, and some states are especially strained. Roughly “26% of the total electricity supply in Virginia and significant shares of the supply in North Dakota (15%), Nebraska (12%), Iowa (11%) and Oregon (11%)” went to data centers in 2023.” The electricity consumption by data centers in the U.S. is projected to more than double by 2030. Ripple effects and what to watch Despite promises of an economic boost through jobs and increased revenue, increased strain on electric grids, water usage, and noise and light pollution have some towns voting to reject data centers. In Georgia, two Democrats were voted in to serve on the Public Service Commission in November – seats not held by a Democrat since 2007. One resident told The New York Times that frustration over rising electric bills and the potential of a data center being built near his ranch led him to vote Democrat for the first time ever in this election. Democrats also flipped seats in Virginia (home to “Data Center Alley”), New Jersey and Pennsylvania. Amid the requests for rate increases across states, consumer watchdogs are hard at work. For example, when electric company Ameren Illinois requested an additional $59.6 million increase for next year (on top of the $308.6 million increase approved last year), The Citizens Utility Board (CUB) “uncovered at least $14 million in wasteful spending,” including $10.8 million proposed to “reimburse shareholders for contributions to their employees’ retirement fund.” If the additional increase is approved, customers would see their monthly bills go up by about 39 cents, but according to CUB Executive Director Sarah Moskowitz, the cost isn’t the real issue: “If Ameren blows through its budget in a given year, customers shouldn’t have to pay the excess.” - REYNOLDS CENTER