Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in need of liquidity use ground leases to unlock capital, investor could gain the benefits.

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Numerous publicly traded realty trusts (REITs) have faced challenges in the past year, with returns mainly routing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that sit on it - have actually been an exception.

Splitting the ownership of commercial land from the structures that rest on it isn't an originality. In some methods, it's the exact same monetary structure that medieval royalty utilized with its subjects. But the democratization of ground leases and their growing appeal is reflective of other sort of securitization throughout the economy - developing narrower and more concentrated return characteristics to fit the requirements of various classes of investors.

And with commercial workplace genuine estate, in specific, in a prominent state of post-lockdown turmoil, the capability to produce a de-risked real estate asset has been warmly accepted 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 numerous on the marketplace in the coming years, triggering other more traditional 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 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, casino 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 regional banking tightening up financing - even with the specter of lower interest rates - we are now seeing land lease queries soar. 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 look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, said in a news release that the company has broadened 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, adopting methods such as predictability of lease payments, a move that causes more effective pricing. Over the last 3 months of 2023, Safehold stock was up nearly 40%.

Growing appeal 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 nation's leading 50 markets. High interest from institutional investors prompted Montgomery Street to expand the swimming pool to $1.5 billion in 2022.

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

Clearly, ground lease mutual fund are among the emerging patterns in genuine estate. Ares Management and property private equity company The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, offer "a more effective kind of financing" that assists unlock possession value.

These current advancements, along with total funding patterns within the property industry, develop a pattern that's tough to neglect: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more offers revealed over the next 10 years. By one estimate, the market could be near to $2.5 trillion in the United States alone, providing a considerable runway for expansion.

How does a land lease work?

Long a staple of family offices trying to find a stable earnings and predictable stream from long-held uninhabited parcels in desirable places, the land lease has actually ended up being widely embraced because the automobile provides a win-win situation for both the structure owner and the landowner.

How does a land lease operate? 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 release crucial capital, directing it toward areas with higher return potential. Simultaneously, the building owner maintains full control of the property while divesting the land underneath it, which, though helpful in the advancement procedure, offers little go back to the general job. 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 discovered appeal in retail, health and fitness facilities and fast-food outlets. Now, various markets are acknowledging the value of this concept. Ground lease payments consist of established annual lease boosts.

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

As the advantages to a job's capital stack become easily evident, ground leases will acquire wider acceptance and be regularly used as a crucial aspect in the genuine estate industry. Predictions recommend that ground leases will become mainstream within the next five to ten years, offering a spectrum of investment opportunities for astute gamers.

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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 composed by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can examine adviser 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 realty business. For over 10 years, he has actually partnered with ultra-high-net-worth people and family workplaces to obtain and handle thousands of multifamily assets throughout the U.S. and Europe, producing consistent returns and favorable social effect.

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