As more residential or commercial property owners in need of liquidity usage ground rents to unlock capital, investor might enjoy the benefits.

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Numerous publicly traded realty trusts (REITs) have actually dealt with obstacles in the previous year, with returns mainly tracking stock exchange indexes. But REITs that are concentrated 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 buildings that sit on it isn't a brand-new idea. In some ways, it's the exact same financial structure that middle ages royalty utilized with its subjects. But the democratization of ground leases and their growing appeal is reflective of other sort of securitization across the economy - producing narrower and more concentrated return attributes to suit the requirements of different classes of investors.

And with business workplace realty, in specific, in a popular state of post-lockdown upheaval, the ability to produce a de-risked real estate possession has actually been warmly accepted by investors.

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

We've 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 standard REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater task 6 miles south of Boston.

Unlocking capital when in need of liquidity

Residential or commercial property owners are utilizing ground leases to open capital in locations where liquidity is lacking. With regional banking tightening up financing - even with the specter of lower rates of interest - we are now seeing land lease inquiries soar. In my own land lease specialty practice, we are fielding more questions from owners and designers in all realty sectors.

One needs to only look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, stated in a news release that the company has 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 growth to a brand-new level of elegance in the land lease market, adopting methods such as predictability of lease payments, a move that leads to more effective prices. Over the last three 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 country's leading 50 markets. High interest from institutional financiers prompted Montgomery Street to broaden the swimming pool to $1.5 billion in 2022.

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

Clearly, ground lease mutual fund are among the emerging patterns in property. Ares Management and property private equity company The Regis Group formed Haven Capital in 2020 to catch growing land lease demand to, in their words, supply "a more efficient type of financing" that helps unlock property worth.

These current developments, together with general financing patterns within the real estate 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 just see more deals announced over the next 10 years. By one price quote, the market might be near to $2.5 trillion in the United States alone, providing a considerable runway for growth.

How does a land lease work?

Long a staple of family offices trying to find a constant earnings and foreseeable stream from long-held uninhabited parcels in preferable areas, the land lease has become extensively welcomed due to the fact that the automobile provides a win-win scenario for both the building 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 gets the land from the structure owner. This arrangement enables the developer to launch vital capital, directing it towards locations with higher return capacity. Simultaneously, the structure owner keeps full control of the possession while divesting the land beneath it, which, though useful in the development process, supplies little go back to the total project. The lease is customized to fit the project.

The Boston Harbor Development works as an illustration of the enduring usage of land leases in the hospitality industry. Additionally, this technique has found popularity in retail, fitness centers and fast-food outlets. Now, numerous industries are recognizing the value of this idea. Ground rent payments include fixed annual lease boosts.

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

As the advantages to a task's capital stack become easily apparent, ground leases will gain wider approval and be frequently utilized as an essential component in the genuine estate market. Predictions recommend that ground leases will end up being mainstream within the next 5 to 10 years, using a spectrum of financial investment opportunities for astute gamers.

Related Content

Bright Spots Amid Commercial Real Estate 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 short article was written by and provides the views of our contributing adviser, not the Kiplinger editorial personnel. 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 company. For over 10 years, he has partnered with ultra-high-net-worth people and household offices to obtain and handle countless multifamily possessions across the U.S. and Europe, generating constant returns and favorable social impact.

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