1 Why Ground Lease REITs are Building In Popularity

Pearlene Fuerst edited this page 2025-06-16 20:33:42 +00:00

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• As more residential or commercial property owners in requirement of liquidity use ground leases to open capital, investor could gain the benefits.-.-.-.-.

As more residential or commercial property owners in requirement of liquidity use ground leases to open capital, investor could gain the benefits.

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  Numerous openly traded realty trusts (REITs) have actually faced challenges in the previous year, with returns largely tracking stock exchange indexes. But REITs that are focused on ground leases - owning the land without owning the structures that sit on it - have actually been an exception.
  
  Splitting the ownership of commercial land from the structures that rest on it isn't a brand-new concept. In some methods, it's the very same financial 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 - creating narrower and more focused return attributes to match the needs of various classes of financiers.
  
  And with business workplace genuine estate, in specific, in a prominent state of post-lockdown turmoil, the capability to create a de-risked property asset has actually been warmly welcomed by investors.
  
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  At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be among several on the marketplace in the coming years, triggering other more standard REITs to diversify their holdings with land leases.
  
  We have actually already seen this with a mega-deal involving Real estate Income and Wynn Resorts. In a deal valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback arrangement with Real estate Income, a conventional REIT, for its Encore Boston Harbor advancement, a hotel, casino and theater task six miles south of Boston.
  
  Unlocking capital when in requirement of liquidity
  
  Residential or commercial property owners are utilizing ground leases to unlock capital in areas where liquidity is lacking. With local banking tightening up lending - even with the specter of lower interest rates - we are now seeing land lease queries soar. In my own land lease specialized practice, we are fielding more questions from owners and designers in all real estate sectors.
  
  One requires to just take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, stated in a press release that the business has expanded 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 development to a brand-new level of elegance in the land lease market, adopting methods such as predictability of lease payments, a relocation that results in more efficient prices. Over the last 3 months of 2023, Safehold stock was up almost 40%.
  
  Growing popularity of ground leases has not gone unnoticed. Three years earlier, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on investments in the country's top 50 markets. High interest from institutional investors triggered Montgomery Street to broaden the pool to $1.5 billion in 2022.
  
  Murray McCabe, a managing partner of Montgomery Street Partners, stated in a press release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering verifies our strategy and verifies that ground leases have evolved to end up being an appropriate and traditional financing tool."
  
  Clearly, ground lease financial investment funds are one of the emerging trends in realty. and property private equity company The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, provide "a more effective kind of funding" that helps unlock asset value.
  
  These current advancements, together with general financing patterns within the genuine estate market, establish a pattern that's tough to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals revealed over the next ten years. By one estimate, the market might be near to $2.5 trillion in the United States alone, offering a substantial runway for growth.
  
  How does a land lease work?
  
  Long a staple of family offices looking for a consistent earnings and predictable stream from long-held uninhabited parcels in preferable areas, the land lease has actually ended up being commonly accepted because the vehicle presents a win-win situation for both the building owner and the landowner.
  
  How does a land lease operate? Typically covering a regard to 50 to 99 years with renewal options, a land lease REIT or sponsor obtains the land from the building owner. This arrangement makes it possible for the developer to release essential capital, directing it toward areas with higher return potential. Simultaneously, the building owner retains full control of the property while divesting the land below it, which, though helpful in the advancement procedure, supplies little go back to the total task. The lease is tailored to fit the job.
  
  The Boston Harbor Development acts as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this technique has actually found popularity in retail, fitness and health facilities and fast-food outlets. Now, different markets are recognizing the value of this principle. Ground lease payments consist of established annual lease boosts.
  
  " Proof of idea continues to spread out," Safehold's Doherty stated.
  
  As the benefits to a task's capital stack become easily obvious, ground leases will get broader approval and be frequently used as an essential element in the property market. Predictions recommend that ground leases will become mainstream within the next 5 to ten years, offering a spectrum of investment opportunities for astute gamers.
  
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  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty business. For over 10 years, he has actually partnered with ultra-high-net-worth individuals and family offices to acquire and manage thousands of multifamily possessions across the U.S. and Europe, creating consistent returns and positive social effect.
  
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