As more residential or commercial property owners in need of liquidity usage ground leases to unlock capital, investor could reap the benefits.

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Numerous openly traded real estate trusts (REITs) have actually faced obstacles in the previous year, with returns largely routing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that sit on it - have been an exception.

Splitting the ownership of commercial land from the structures that rest on it isn't a new concept. In some methods, it's the exact same financial structure that medieval royalty utilized with its topics. But the democratization of ground leases and their growing appeal is reflective of other kinds of securitization throughout the economy - producing narrower and more concentrated return qualities to suit the needs of different classes of investors.

And with industrial office property, in specific, in a prominent state of post-lockdown upheaval, the ability to create a de-risked property property has been warmly embraced by financiers.

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

We've already seen this with a mega-deal involving Real estate 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 job 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 lacking. With regional banking tightening up financing - even with the specter of lower rate 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 developers in all real estate sectors.

One requires to only look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a press release that the company has actually expanded land lease offers from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He associated the development to a brand-new level of sophistication in the land lease market, adopting strategies such as predictability of lease payments, a move that leads to more efficient rates. Over the last 3 months of 2023, Safehold stock was up nearly 40%.

Growing popularity of ground leases has actually not gone undetected. Three years back, Dallas-based Montgomery Street Partners started 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 handling partner of Montgomery Street Partners, stated in a press release, "The strong demand we've seen for GLR's (ground lease REIT) follow-on equity offering confirms our strategy and verifies that ground leases have progressed to become an appropriate and traditional funding tool."

Clearly, ground lease financial investment funds are one of the emerging patterns in property. Ares Management and realty personal equity firm The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, supply "a more efficient kind of financing" that helps unlock possession value.

These current developments, together with total funding trends within the realty industry, establish a pattern that's tough to disregard: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more deals revealed over the next 10 years. By one estimate, the marketplace might be near to $2.5 trillion in the United States alone, providing a significant runway for growth.

How does a land lease work?

Long a staple of household workplaces searching for a constant earnings and foreseeable stream from long-held uninhabited parcels in desirable areas, the land lease has actually ended up being widely embraced since the car presents a win-win situation for both the structure owner and the landowner.

How does a land lease run? Typically spanning a regard to 50 to 99 years with renewal options, a land lease REIT or sponsor obtains the land from the structure owner. This plan makes it possible for the designer to release vital capital, directing it towards areas with greater return capacity. Simultaneously, the structure owner keeps complete control of the possession while divesting the land below it, which, though useful in the advancement procedure, offers little return to the general project. The lease is tailored to fit the project.

The Boston Harbor Development functions as an illustration of the long-standing use of land leases in the hospitality market. Additionally, this method has found popularity in retail, fitness centers and fast-food outlets. Now, numerous industries are recognizing the value of this idea. Ground lease payments consist of fixed annual lease increases.

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

As the advantages to a job's capital stack become easily evident, ground leases will acquire broader acceptance and be frequently used as a crucial element in the property market. Predictions suggest that ground leases will become mainstream within the next 5 to ten years, providing a spectrum of financial investment opportunities for astute players.

Related Content

Bright Spots Amid Commercial Property 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 written by and provides the views of our contributing consultant, not the Kiplinger editorial staff. You can inspect 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 genuine estate company. For over ten years, he has actually partnered with ultra-high-net-worth individuals and family workplaces to acquire and manage thousands of multifamily possessions across the U.S. and Europe, generating constant returns and positive social effect.

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