As more residential or commercial property owners in requirement of liquidity usage ground rents to open capital, genuine estate investors might reap the rewards.

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Numerous openly traded property trusts (REITs) have actually dealt with obstacles in the previous year, with returns mainly routing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that rest on it - have actually been an exception.

Splitting the ownership of industrial land from the structures that sit on it isn't an originality. In some ways, it's the same financial structure that medieval royalty used with its topics. But the democratization of ground leases and their growing popularity is reflective of other sort of securitization throughout the economy - producing narrower and more focused return characteristics to suit the requirements of various classes of investors.

And with industrial office realty, in specific, in a popular state of post-lockdown turmoil, the ability to create a de-risked real estate asset has actually been warmly welcomed by investors.

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

We have actually 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 traditional REIT, for its Encore Boston Harbor advancement, a hotel, gambling establishment and theater job 6 miles south of Boston.

Unlocking capital when in requirement of liquidity

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

One requires to only take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, said in a news release that the business 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 attributed the growth to a brand-new level of elegance in the land lease market, embracing methods such as predictability of lease payments, a relocation that results in more effective prices. Over the last three months of 2023, Safehold stock was up nearly 40%.

Growing popularity of ground leases has not gone unnoticed. Three years ago, 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 swimming pool to $1.5 billion in 2022.

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

Clearly, ground lease financial investment funds are among the emerging patterns in property. 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, offer "a more efficient form of financing" that helps unlock asset worth.

These current developments, together with overall financing trends within the property market, establish a pattern that's hard to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more offers revealed over the next ten years. By one quote, the market could be close 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 offices looking for a stable income and predictable stream from long-held vacant parcels in desirable locations, the land lease has actually ended up being extensively embraced since the car presents a win-win scenario for both the structure owner and the landowner.

How does a land lease run? Typically covering a regard to 50 to 99 years with renewal alternatives, a land lease REIT or sponsor obtains the land from the structure owner. This plan makes it possible for the designer to launch essential capital, directing it towards areas with greater return capacity. Simultaneously, the building owner retains complete control of the property while divesting the land below it, which, though beneficial in the development procedure, provides little return to the general task. The lease is customized to fit the project.

The Boston Harbor Development works as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this approach has actually found appeal in retail, health and fitness facilities and fast-food outlets. Now, various markets are recognizing the value of this concept. Ground rent payments include predetermined yearly lease boosts.

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

As the advantages to a project's capital stack ended up being easily evident, ground leases will acquire larger acceptance and be routinely used as a crucial element in the property market. Predictions recommend that ground leases will become mainstream within the next five to ten years, offering a spectrum of financial investment chances for astute gamers.

Related Content

Bright Spots Amid Commercial Real Estate 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 personnel. You can examine consultant 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 company. For over ten years, he has partnered with ultra-high-net-worth individuals and family workplaces to get and handle thousands of multifamily possessions across the U.S. and Europe, creating consistent returns and positive social impact.

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