1 Why Ground Lease REITs are Building In Popularity

Cristine Colvin edited this page 2025-06-20 12:33:37 +08:00

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• As more residential or commercial property owners in need of liquidity usage ground leases to open capital, real estate financiers might reap the benefits.wikipedia.org-.-.-.-.

As more residential or commercial property owners in need of liquidity usage ground leases to open capital, real estate financiers might reap the benefits.
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  Numerous publicly traded property trusts (REITs) have dealt with challenges in the past year, with returns mainly routing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that rest on it - have actually been an exception.
  
  Splitting the ownership of industrial land from the buildings that rest on it isn't a brand-new concept. In some ways, it's the exact same monetary structure that medieval royalty used with its topics. But the democratization of ground leases and their growing appeal is reflective of other type of securitization throughout the economy - developing narrower and more focused return attributes to fit the requirements of various classes of investors.
  
  And with commercial office property, in specific, in a popular state of post-lockdown upheaval, the capability to develop a de-risked realty property has been warmly accepted by financiers.
  
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  At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of a number of on the marketplace in the coming years, prompting other more conventional REITs to diversify their holdings with land leases.
  
  We have actually already seen this with a mega-deal including Income and Wynn Resorts. In a transaction valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback arrangement with Real estate Income, a traditional REIT, for its Encore Boston Harbor advancement, a hotel, gambling establishment and theater project 6 miles south of Boston.
  
  Unlocking capital when in need of liquidity
  
  Residential or commercial property owners are using ground leases to unlock capital in locations where liquidity is doing not have. With regional banking tightening up lending - even with the specter of lower rates of interest - we are now seeing land lease questions soar. In my own land lease specialized practice, we are fielding more inquiries from owners and designers in all realty sectors.
  
  One needs to only look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, said in a press release that the business has actually broadened land lease deals from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He attributed the growth to a brand-new level of elegance in the land lease market, adopting techniques such as predictability of lease payments, a relocation that results in more efficient pricing. Over the last 3 months of 2023, Safehold stock was up almost 40%.
  
  Growing appeal of ground leases has actually not gone unnoticed. Three years ago, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on investments in the nation's leading 50 markets. High interest from institutional investors prompted Montgomery Street to broaden the pool to $1.5 billion in 2022.
  
  Murray McCabe, a managing partner of Montgomery Street Partners, said in a news release, "The strong need we've seen for GLR's (ground lease REIT) follow-on equity offering verifies our strategy and verifies that ground leases have actually developed to become an acceptable and traditional funding tool."
  
  Clearly, ground lease mutual fund are among the emerging patterns in real estate. Ares Management and genuine estate private equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, offer "a more effective type of funding" that helps unlock possession worth.
  
  These recent advancements, along with total financing patterns within the real estate industry, develop a pattern that's tough to ignore: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals announced over the next ten years. By one quote, the market might be near $2.5 trillion in the United States alone, supplying a substantial runway for growth.
  
  How does a land lease work?
  
  Long a staple of family offices trying to find a steady earnings and foreseeable stream from long-held uninhabited parcels in desirable areas, the land lease has ended up being widely welcomed due to the fact that the automobile presents a win-win situation for both the structure owner and the landowner.
  
  How does a land lease operate? Typically spanning a term of 50 to 99 years with renewal choices, a land lease REIT or sponsor gets the land from the building owner. This plan makes it possible for the designer to launch vital capital, directing it toward areas with greater return capacity. Simultaneously, the structure owner keeps complete control of the property while divesting the land underneath it, which, though beneficial in the development process, supplies little go back to the overall job. The lease is tailored to fit the task.
  
  The Boston Harbor Development functions as an illustration of the enduring use of land leases in the hospitality market. Additionally, this method has actually found appeal in retail, health and wellness facilities and fast-food outlets. Now, different markets are acknowledging the worth of this concept. Ground rent payments include fixed yearly lease increases.
  
  " Proof of idea continues to spread," Safehold's Doherty stated.
  
  As the advantages to a project's capital stack ended up being easily evident, ground leases will get broader approval and be routinely used as a key aspect in the realty industry. Predictions recommend that ground leases will become mainstream within the next five to ten years, using a spectrum of financial investment chances for astute gamers.
  
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  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based real estate company. For over ten years, he has partnered with ultra-high-net-worth individuals and family workplaces to obtain and manage countless multifamily possessions across the U.S. and Europe, generating consistent returns and positive social impact.
  
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