Health systems structure ground leases for campus expansion by retaining ownership of the land while leasing it to a developer or partner who finances and constructs the building, preserving capital and balance sheet capacity for clinical investment.

Why It Matters

Campus expansion is one of the most capital-intensive decisions a health system will make. A new medical office building or ambulatory care facility can cost between $350 and $650 per square foot to construct, and projects ranging from 50,000 to 200,000 square feet are common for mid-size health systems. Tying up $20 million to $130 million in real estate development competes directly with investments in equipment, staffing, and clinical infrastructure.

Ground leases offer an alternative that keeps the land on the health system’s balance sheet as an asset while transferring development risk and upfront capital costs to a third party. For health system CFOs navigating constrained operating margins — which averaged just 1.8% across nonprofit systems in 2023 according to Kaufman Hall — this structure can be the difference between a feasible expansion and a deferred one.

How It Works

In a ground lease, the health system (as the landowner) enters a long-term agreement — typically 40 to 99 years — granting a developer the right to build and operate a facility on that land. The developer secures its own financing, designs the building, and manages construction. The health system receives annual ground rent, typically calculated as 6% to 10% of the land’s appraised value, and retains reversion rights, meaning the building returns to the health system at lease expiration.

The health system usually negotiates a master lease or anchor tenant agreement within the same structure, committing to occupy a defined portion of the building — often 30% to 60% of total square footage — which gives the developer the creditworthy tenant it needs to secure construction financing. This layered structure allows both parties to achieve their objectives without the health system absorbing full development cost. Health systems in markets like Indianapolis, IN have used this model to expand ambulatory campuses near high-growth suburban corridors without drawing on debt capacity reserved for acute care infrastructure.

Key Considerations

The ground rent formula and escalation structure are among the most negotiated terms. Most agreements include rent escalations tied to CPI or a fixed annual percentage — commonly 1.5% to 3% — over the lease term. Health systems should insist on fair market value resets at defined intervals, typically every 10 years, to prevent the rent from becoming economically misaligned with underlying land appreciation. The AHJ (authority having jurisdiction) for zoning and land use approvals must also be engaged early, as permitting timelines in dense suburban markets can add 12 to 24 months to a project schedule.

Subordination and leasehold financing rights are often contentious. Developers typically need to subordinate their leasehold interest to their lender, which creates risk for the health system if the developer defaults. Experienced healthcare real estate counsel should review non-disturbance agreements carefully to ensure the health system’s operational continuity is protected in any default scenario. As outlined in our healthcare real estate services, transaction structuring details like these materially affect long-term financial outcomes for health systems.

Actionable Takeaway

Before entering any ground lease negotiation, health systems should commission an independent land appraisal and a 40-year net present value analysis of the ground rent stream versus alternative capital deployment scenarios. This analysis should compare the ground lease structure against a direct development model, a joint venture, and a sale-leaseback to ensure the board is selecting the structure with the highest risk-adjusted return. Engaging a healthcare-specialized real estate advisor 18 to 24 months before projected groundbreaking allows sufficient time to structure the deal, complete entitlements, and align the agreement with the system’s long-range facility plan.

Health systems with underutilized land adjacent to existing campuses are particularly well-positioned to use this structure. If your system owns land that is not generating clinical or financial value, a ground lease may be the most capital-efficient path to expansion. To explore whether this model fits your portfolio strategy, schedule a consultation with our advisory team to review your asset map and development objectives. You can also learn more about how we approach healthcare facility strategy at Bremner’s homepage.

Frequently Asked Questions

What is a ground lease in the context of healthcare real estate?

A ground lease is a long-term agreement in which a landowner — in this case, a health system — leases its land to a developer who finances and constructs a building on that site. The health system retains ownership of the land throughout the lease term, which typically ranges from 40 to 99 years, and regains ownership of the building at lease expiration. This structure allows health systems to facilitate campus expansion without committing their own capital to construction costs.

How is ground rent calculated for a health system campus project?

Ground rent is most commonly calculated as a percentage of the land’s independently appraised fair market value, with rates typically falling between 6% and 10% annually. The specific rate depends on market conditions, the creditworthiness of the developer, and the terms of the anchor tenant agreement. Most agreements also include periodic rent resets — often every 10 years — to ensure the rent remains aligned with changes in land value over the lease term.

What are the risks for a health system entering a ground lease?

The primary risks include developer default, loss of operational control over the building during the lease term, and the complexity of subordination agreements required by the developer’s lender. If the developer defaults on its financing, the health system’s continued tenancy in the building may be at risk without a properly structured non-disturbance agreement in place. Health systems should also consider the reputational and operational exposure if a developer partner experiences financial distress mid-project.

How long does it take to structure and execute a ground lease for campus expansion?

From initial site assessment to executed ground lease, the process typically takes 12 to 24 months, depending on the complexity of the transaction and the speed of local permitting and entitlement approvals. Health systems that begin the process without an advisor or legal counsel experienced in healthcare ground leases often encounter delays related to subordination negotiations, AHJ approvals, and lender due diligence requirements. Starting the process 18 to 24 months before the intended groundbreaking is generally considered best practice.

Can a health system use a ground lease for ambulatory surgery center or medical office development?

Yes, ground leases are frequently used for both ambulatory surgery center (ASC) and medical office building (MOB) development on health system campuses. An ASC is an outpatient facility licensed to perform surgical procedures that do not require overnight hospitalization, and an MOB is a multi-tenant or single-tenant building designed for physician office and clinical use. Both facility types are well-suited to ground lease structures because developers can secure third-party financing against a creditworthy health system anchor tenant, reducing development risk for all parties involved.

Bremner Real Estate partners with health systems to align real estate strategy with clinical performance and capital efficiency.