Leasehold Estate

A leasehold estate is a tenant's legal right to occupy and use land or a building for the term of a lease, while the landlord keeps ownership. In investment property, the term often refers to buying a building that sits on ground leased from someone else. The ground rent then becomes an operating expense.

On a ground lease, the investor owns the building but pays rent for the land underneath. That ground rent reduces NOI just like property tax does. A building earning $40,000 before a $10,000 ground rent has $30,000 of NOI to the leasehold owner.

Value depends on the years left on the ground lease. When the lease expires, the land and often the building return to the landowner. Lenders and buyers look closely at leaseholds with short remaining terms, and the cap rate usually runs higher than for the same building owned outright.