Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in requirement of liquidity usage ground leases to unlock capital, real estate investors might gain the benefits.

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Numerous openly traded genuine estate trusts (REITs) have actually faced challenges in the past year, with returns mostly tracking stock market indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that sit on it - have actually been an exception.

Splitting the ownership of business land from the structures that sit on it isn't an originality. In some methods, it's the 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 across the economy - developing narrower and more concentrated return qualities to fit the needs of various classes of financiers.

And with commercial office property, in specific, in a prominent state of post-lockdown upheaval, the capability to create a de-risked realty asset 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 traditional REITs to diversify their holdings with land leases.

We've currently 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 standard REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater job six miles south of Boston.

Unlocking capital when in need of liquidity

Residential or commercial property owners are using ground leases to open capital in areas where liquidity is doing not have. With local banking tightening up lending - even with the specter of lower rates of interest - we are now seeing land lease inquiries soar. In my own land lease specialized practice, we are fielding more inquiries from owners and designers in all property sectors.

One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, stated in a news release that the company has actually expanded land lease deals from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He associated the development to a new level of elegance in the land lease market, embracing techniques such as predictability of lease payments, a relocation that causes more efficient prices. Over the last 3 months of 2023, Safehold stock was up almost 40%.

Growing popularity of ground leases has actually not gone unnoticed. Three years ago, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on investments in the country's leading 50 markets. High interest from institutional financiers triggered Montgomery Street to broaden the swimming pool to $1.5 billion in 2022.

Murray McCabe, a managing partner of Montgomery Street Partners, stated in a news release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering confirms our method and verifies that ground leases have actually developed to end up being an appropriate and mainstream financing tool."

Clearly, ground lease mutual fund are one of the emerging patterns in realty. Ares Management and property private equity firm The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, offer "a more effective type of financing" that helps unlock property value.

These current developments, along with total funding patterns within the realty industry, establish a pattern that's hard to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more offers revealed over the next 10 years. By one quote, the market could be near $2.5 trillion in the United States alone, offering a substantial runway for expansion.

How does a land lease work?

Long a staple of family offices looking for a constant income and predictable stream from long-held uninhabited parcels in preferable places, the land lease has actually become widely accepted since the lorry presents a win-win situation for both the building owner and the landowner.

How does a land lease operate? Typically covering a term of 50 to 99 years with renewal choices, a land lease REIT or sponsor acquires the land from the structure owner. This arrangement allows the developer to launch crucial capital, directing it towards areas with greater return capacity. Simultaneously, the building owner keeps complete control of the property while divesting the land beneath it, which, though beneficial in the advancement process, supplies little go back to the overall project. The lease is customized to fit the job.

The Boston Harbor Development functions as an illustration of the enduring use of land leases in the hospitality industry. Additionally, this method has found popularity in retail, health and wellness facilities and fast-food outlets. Now, different markets are acknowledging the value of this idea. Ground rent payments consist of predetermined annual lease boosts.

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

As the benefits to a job's capital stack ended up being easily apparent, ground leases will gain wider approval and be regularly employed as a key aspect in the property market. Predictions recommend that ground leases will become mainstream within the next five to 10 years, using a spectrum of investment chances for astute gamers.

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 post was written by and presents 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 genuine estate business. For over ten years, he has actually partnered with ultra-high-net-worth people and household workplaces to acquire and handle thousands of multifamily assets throughout the U.S. and Europe, producing constant returns and favorable social effect.

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