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, genuine estate financiers might reap the rewards.


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


Splitting the ownership of business land from the buildings that sit on it isn't an originality. In some methods, it's the same financial structure that middle ages royalty utilized with its topics. But the democratization of ground leases and their growing popularity is reflective of other type of securitization across the economy - producing narrower and more concentrated return characteristics to suit the requirements of various classes of investors.


And with industrial workplace realty, in particular, in a prominent state of post-lockdown turmoil, the capability to produce a de-risked property possession has actually been warmly embraced 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 conventional REITs to diversify their holdings with land leases.


We have actually 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 conventional REIT, for its Encore Boston Harbor development, a hotel, casino and theater job six miles south of Boston.


Unlocking capital when in requirement of liquidity


Residential or commercial property owners are utilizing ground leases to open capital in locations where liquidity is doing not have. With local banking tightening up loaning - even with the specter of lower rate of interest - we are now seeing land lease questions shoot up. 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 touted 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 value of the portfolio at more than $6 billion. He attributed the development to a new level of elegance in the land lease market, adopting methods such as predictability of lease payments, a move that causes more efficient pricing. 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 began a $1 billion REIT targeted on financial investments in the country's top 50 markets. High interest from institutional investors prompted Montgomery Street to expand the pool to $1.5 billion in 2022.


Murray McCabe, a handling 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 validates our technique and validates that ground leases have actually developed to end up being an acceptable and traditional financing tool."


Clearly, ground lease financial investment funds are among the emerging patterns in real estate. Ares Management and realty private equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease need to, in their words, provide "a more efficient type of financing" that assists unlock property value.


These current developments, in addition to total funding patterns 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 offers revealed over the next ten years. By one estimate, the market might be close 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 family offices looking for a stable earnings and foreseeable stream from long-held vacant parcels in desirable locations, the land lease has ended up being widely accepted because the lorry presents a win-win circumstance 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 obtains the land from the building owner. This plan allows the designer to launch vital capital, directing it toward locations with greater return capacity. Simultaneously, the building owner keeps full control of the possession while divesting the land beneath it, which, though useful in the advancement procedure, supplies little return to the total job. The lease is customized to fit the task.


The Boston Harbor Development works as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this method has actually found appeal in retail, fitness and health facilities and fast-food outlets. Now, different markets are acknowledging the worth of this concept. Ground lease payments consist of fixed annual lease increases.


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


As the advantages to a job's capital stack become easily obvious, ground leases will gain wider approval and be routinely utilized as a crucial element in the realty industry. Predictions recommend that ground leases will become mainstream within the next five to ten years, using a spectrum of investment chances for astute players.


Related Content


Bright Spots Amid Commercial Property Struggles.

REITs Unveiled: A Comprehensive Guide for Investors.

How to Find the 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 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 property business. For over ten years, he has actually partnered with ultra-high-net-worth people and family workplaces to get and manage thousands of multifamily properties across the U.S. and Europe, generating constant returns and favorable social effect.


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