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 could enjoy the rewards.

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Numerous openly traded realty trusts (REITs) have dealt with obstacles in the past year, with returns mostly trailing stock market indexes. But REITs that are focused 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 sit on it isn't a brand-new idea. In some ways, 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 type of securitization throughout the economy - developing narrower and more focused return attributes to fit the needs of various classes of financiers.

And with business workplace realty, in particular, in a popular state of post-lockdown upheaval, the capability to produce a de-risked property asset has been warmly accepted 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 several on the marketplace in the coming years, prompting other more conventional REITs to diversify their holdings with land leases.

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

Unlocking capital when in requirement of liquidity

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

One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the business has expanded land lease deals from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He attributed the growth to a new level of elegance in the land lease market, embracing methods such as predictability of lease payments, a move that leads to more efficient rates. Over the last three months of 2023, Safehold stock was up nearly 40%.

Growing popularity of ground leases has not gone undetected. Three years earlier, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on financial investments in the nation's top 50 markets. High interest from institutional financiers prompted Montgomery Street to expand the swimming pool to $1.5 billion in 2022.

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

Clearly, ground lease mutual fund are one of the emerging patterns in real estate. Ares Management and genuine estate private equity company The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, offer "a more efficient type of funding" that helps unlock asset value.

These recent advancements, together with general funding patterns within the real estate industry, establish a pattern that's difficult to neglect: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals announced over the next ten years. By one quote, the market might be near $2.5 trillion in the United States alone, providing a substantial runway for growth.

How does a land lease work?

Long a staple of household offices searching for a constant earnings and foreseeable stream from long-held vacant parcels in desirable areas, the land lease has become commonly embraced due to the fact that the lorry presents a win-win scenario 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 choices, a land lease REIT or sponsor obtains the land from the structure owner. This plan enables the designer to launch crucial capital, directing it toward areas with greater return potential. Simultaneously, the structure owner retains complete control of the property while divesting the land below it, which, though helpful in the advancement procedure, provides little return to the general project. The lease is customized to fit the job.

The Boston Harbor Development functions as an illustration of the enduring usage of land leases in the hospitality industry. Additionally, this approach has actually found popularity in retail, health and wellness facilities and fast-food outlets. Now, numerous industries are acknowledging the value of this concept. Ground lease payments include fixed annual lease boosts.

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

As the advantages to a task's capital stack ended up being easily evident, ground leases will gain larger approval and be routinely utilized as a crucial element in the property industry. Predictions recommend that ground leases will end up being mainstream within the next five to 10 years, providing a spectrum of investment opportunities for astute gamers.

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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 short article was written by and provides the views of our contributing adviser, not the Kiplinger editorial personnel. You can examine 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 partnered with ultra-high-net-worth individuals and family workplaces to obtain and handle countless multifamily assets across the U.S. and Europe, generating consistent returns and positive social impact.

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