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Why Ground Lease REITs are Building In Popularity
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Why Ground Lease REITs are Building In Popularity
lavondadixson edited this page 2025-06-22 04:20:43 +02:00
washingtonian.com
As more residential or commercial property owners in requirement of liquidity use ground leases to unlock capital, real estate investors could enjoy the benefits.
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Numerous openly traded real estate trusts (REITs) have actually faced challenges in the past year, with returns mainly trailing stock market indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that rest on it - have been an exception.
Splitting the ownership of commercial land from the buildings that sit on it isn't a new concept. In some methods, it's the very 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 - creating narrower and more focused return qualities to suit the requirements of various classes of financiers.
And with business office real estate, in particular, in a popular state of post-lockdown turmoil, the capability to create a de-risked property possession has been warmly accepted by financiers.
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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 marketplace in the coming years, triggering 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 plan with Real estate Income, a conventional 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 open capital in locations 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 specialty practice, we are fielding more questions from owners and developers in all realty sectors.
One requires to only look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, said in a news release that the company has actually expanded land lease deals from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He associated the growth to a brand-new level of sophistication in the land lease market, adopting methods such as predictability of lease payments, a relocation that leads to more effective pricing. Over the last three months of 2023, Safehold stock was up nearly 40%.
Growing appeal of ground leases has actually not gone unnoticed. Three years back, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on investments in the country's top 50 markets. High interest from institutional financiers triggered Montgomery Street to broaden the pool to $1.5 billion in 2022.
Murray McCabe, a managing partner of Montgomery Street Partners, said in a press release, "The strong need we've seen for GLR's (ground lease REIT) follow-on equity offering verifies our technique and confirms that ground leases have evolved to become an appropriate and mainstream funding tool."
Clearly, ground lease mutual fund are among the emerging trends in property. 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, supply "a more effective form of funding" that helps unlock asset worth.
These recent advancements, together with total financing trends within the property industry, establish a pattern that's difficult to disregard: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals announced over the next 10 years. By one estimate, the marketplace could be near to $2.5 trillion in the United States alone, supplying a considerable runway for expansion.
How does a land lease work?
Long a staple of household offices trying to find a stable earnings and predictable stream from long-held vacant parcels in preferable places, the land lease has actually ended up being extensively 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 spanning a term of 50 to 99 years with renewal options, a land lease REIT or sponsor gets the land from the building owner. This plan allows the designer to launch important capital, directing it towards areas with higher return potential. Simultaneously, the structure owner maintains complete control of the possession while divesting the land beneath it, which, though useful in the advancement process, offers little return to the overall project. The lease is customized to fit the project.
The Boston Harbor Development serves as an illustration of the enduring use of land leases in the hospitality market. Additionally, this method has discovered appeal in retail, health and physical fitness facilities and fast-food outlets. Now, numerous markets are acknowledging the value of this principle. Ground lease payments consist of predetermined annual lease increases.
" Proof of concept continues to spread," Safehold's Doherty stated.
As the benefits to a job's capital stack ended up being readily apparent, ground leases will acquire wider acceptance and be frequently utilized as a crucial element in the genuine estate industry. Predictions suggest that ground leases will become mainstream within the next five to 10 years, providing a spectrum of investment chances for astute gamers.
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Real Estate Investing: How You Can Profit Now.
This short article was composed by and provides the views of our contributing consultant, not the Kiplinger editorial staff. 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 business. For over ten years, he has actually partnered with ultra-high-net-worth individuals and family offices to obtain and handle thousands of multifamily possessions across the U.S. and Europe, producing consistent returns and positive social impact.
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