Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in requirement of liquidity usage ground rents to open capital, investor might gain the benefits.

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Numerous publicly traded realty trusts (REITs) have faced challenges in the previous year, with returns mainly trailing stock exchange indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that sit on it - have actually been an exception.

Splitting the ownership of commercial land from the buildings that sit on it isn't a brand-new concept. In some methods, it's the exact same financial structure that middle ages royalty utilized with its subjects. But the democratization of ground leases and their growing popularity is reflective of other type of securitization throughout the economy - producing narrower and more focused return attributes to fit the needs of various classes of financiers.

And with commercial office property, in particular, in a prominent state of post-lockdown upheaval, the ability to develop a de-risked property property has been warmly embraced by investors.

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At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be among numerous on the market in the coming years, triggering other more traditional REITs to diversify their holdings with land leases.

We have actually already seen this with a mega-deal including Real estate Income and Wynn Resorts. In a deal valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback plan with Real estate Income, a traditional REIT, for its Encore Boston Harbor advancement, a hotel, casino and theater job 6 miles south of Boston.

Unlocking capital when in need 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 financing - even with the specter of lower rates of interest - we are now seeing land lease inquiries soar. In my own land lease specialty practice, we are fielding more inquiries from owners and designers in all genuine estate sectors.

One requires to only take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, stated in a news release that the company has actually expanded land lease offers 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 new level of sophistication in the land lease market, adopting techniques such as predictability of lease payments, a relocation that causes more efficient pricing. Over the last three months of 2023, Safehold stock was up nearly 40%.

Growing popularity of ground leases has actually not gone undetected. Three years ago, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on financial investments in the country's leading 50 markets. High interest from institutional investors triggered Montgomery Street to expand the swimming 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 progressed to become an acceptable and traditional financing tool."

Clearly, ground lease financial investment funds are among the emerging trends in real estate. Ares Management and realty personal equity firm The Regis Group formed Haven Capital in 2020 to record growing land lease need to, in their words, offer "a more efficient kind of financing" that helps unlock asset value.

These recent developments, along with general financing patterns within the property industry, establish a pattern that's hard to ignore: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more offers announced over the next ten years. By one quote, the marketplace might be near $2.5 trillion in the United States alone, providing a considerable runway for growth.

How does a land lease work?

Long a staple of family offices looking for a stable earnings and foreseeable stream from long-held uninhabited parcels in desirable areas, the land lease has actually ended up being widely accepted due to the fact that the vehicle provides a win-win situation for both the building owner and the landowner.

How does a land lease run? Typically covering a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor acquires the land from the structure owner. This plan allows the designer to release essential capital, directing it toward areas with greater return capacity. Simultaneously, the structure owner maintains complete control of the asset while divesting the land underneath it, which, though useful in the development procedure, supplies little return to the total project. The lease is customized to fit the task.

The Boston Harbor Development serves as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this method has actually found popularity in retail, fitness facilities and fast-food outlets. Now, numerous industries are acknowledging the worth of this concept. Ground rent payments include established annual lease boosts.

" Proof of concept continues to spread," Safehold's Doherty stated.

As the advantages to a project's capital stack ended up being easily obvious, ground leases will gain larger acceptance and be regularly employed as a key element in the property market. Predictions suggest that ground leases will end up being mainstream within the next five to 10 years, offering a spectrum of chances for astute players.

Related Content

Bright Spots Amid Commercial Real Estate Struggles.
REITs Unveiled: A Comprehensive Guide for Investors.
How to Find the very best REIT Stocks.
Publicly Traded REITs vs. Non-Traded REITs: What's the Difference?
Real Estate Investing: How You Can Profit Now.
This article was composed by and presents the views of our contributing consultant, not the Kiplinger editorial personnel. You can check advisor records with the SEC or with FINRA.

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Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based property company. For over 10 years, he has actually partnered with ultra-high-net-worth individuals and family offices to obtain and manage thousands of multifamily properties throughout the U.S. and Europe, generating constant returns and positive social effect.

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