leonort5186200

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.

-.
-.
-.
-.
–
– Newsletter sign up Newsletter.
–

When you buy through links on our site, we might earn an affiliate commission. Here’s how it works.

Numerous publicly traded real estate trusts (REITs) have dealt with obstacles in the previous year, with returns mostly routing stock market indexes. But REITs that are focused on ground leases – owning the land without owning the structures that sit on it – have actually been an exception.

Splitting the ownership of commercial land from the structures that rest on it isn’t a brand-new concept. In some methods, it’s the exact same monetary structure that middle ages royalty used with its topics. But the democratization of ground leases and their growing appeal is reflective of other type of securitization across the economy – developing narrower and more concentrated return characteristics to suit the requirements of various classes of financiers.

And with business office property, in specific, in a popular state of post-lockdown turmoil, the capability to produce a de-risked property asset has actually been warmly embraced by financiers.

Register for Kiplinger’s Personal Finance

Be a smarter, much better educated investor.

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the very best of specialist recommendations on investing, taxes, retirement, individual financing and more – straight to your e-mail.

Profit and flourish with the best of professional recommendations – straight to your e-mail.

At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be among several on the market in the coming years, triggering other more standard 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 arrangement with Real estate Income, a standard REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater project 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 areas where liquidity is lacking. With local banking tightening up financing – even with the specter of lower rate of interest – we are now seeing land lease questions shoot up. In my own land lease specialized practice, we are fielding more inquiries from owners and designers in all property sectors.

One requires to only take a 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 value of the portfolio at more than $6 billion. He associated the growth to a brand-new level of sophistication in the land lease market, adopting techniques such as predictability of lease payments, a move that results in more efficient rates. Over the last three months of 2023, Safehold stock was up nearly 40%.

Growing appeal of ground leases has not gone unnoticed. Three years ago, Street Partners started a $1 billion REIT targeted on financial investments in the nation’s top 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 press release, “The strong demand we’ve seen for GLR’s (ground lease REIT) follow-on equity offering validates our strategy and validates that ground leases have progressed to end up being an acceptable and traditional financing tool.”

Clearly, ground lease financial investment funds are one of the emerging patterns in realty. Ares Management and realty private equity company The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, provide “a more effective form of financing” that helps unlock asset value.

These recent advancements, along with general financing patterns within the property market, develop a pattern that’s hard to disregard: 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 close 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 workplaces looking for a stable income and foreseeable stream from long-held uninhabited parcels in desirable locations, the land lease has actually ended up being commonly accepted since the vehicle provides a win-win scenario for both the structure 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 building owner. This arrangement allows the developer to launch vital capital, directing it towards areas with higher return potential. Simultaneously, the building owner keeps complete control of the possession while divesting the land beneath it, which, though helpful in the advancement procedure, provides little go back to the total project. The lease is tailored to fit the job.

The Boston Harbor Development serves as an illustration of the enduring usage of land leases in the hospitality industry. Additionally, this approach has found appeal in retail, health and wellness centers and fast-food outlets. Now, various industries are acknowledging the worth of this idea. Ground rent payments include predetermined annual lease increases.

” Proof of concept continues to spread out,” Safehold’s Doherty stated.

As the benefits to a project’s capital stack ended up being easily obvious, ground leases will get broader approval and be regularly utilized as a crucial element in the realty industry. Predictions recommend that ground leases will end up being mainstream within the next 5 to ten years, using a spectrum of investment chances for astute players.

Related Content

Bright Spots Amid Commercial Realty 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 short article was written by and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can inspect advisor records with the SEC or with FINRA.

Get Kiplinger Today newsletter – totally free

Profit and succeed with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and far more. Delivered daily. Enter your e-mail in the box and click Sign Me Up.

Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based genuine estate business. For over 10 years, he has actually partnered with ultra-high-net-worth individuals and family workplaces to get and manage thousands of multifamily possessions throughout the U.S. and Europe, generating constant returns and positive social impact.

Four things you can do today to up your monetary readiness SPONSORED Don’t get captured economically flat-footed.

Millions To Lose Medical Insurance Unless Congress Acts The Kiplinger Tax Letter If current rules for the health premium tax credit (PTC), a popular Obamacare subsidy, aren’t extended, 3.7 million individuals could lose their medical insurance.

Look out for Annuity Surrender Charges: How to Avoid Them Pulling cash out of an annuity early can be an expensive proposition. Here’s how surrender charges work and one possible method around them – an annuity “ladder.”

The Snake Bite Effect: How Fear Can Cost Investors Dearly Does market volatility make you feel like running terrified? That could be an expensive mistake. Here’s why … and what to do rather.

I’m a Wealth Manager: This Is How to Reduce One of the Biggest Risks to Your Retirement If the stock exchange dips when you retire, your portfolio may not have time to recover. But having a structured earnings prepare for your retirement years can assist.

Ditch the Fear: A Guide to Embracing Retirement Preparedness Don’t be frightened about lacking money, be prepared. This monetary professional explains how you can help take control of three crucial retirement threat aspects with a little planning.

Jet Set on a Budget: Expert Advice for Summer Travel These cost-saving techniques, supplied by a monetary advisor, are important for taking pleasure in summer season travel without financial tension or financial obligation.

Four Innovations That Reinvented Retirement as We Know It and Why AI Is Next A monetary expert explores the innovations that have improved our lives throughout the years – and what the next revolution, AI, might suggest for your legacy.

What Will They Remember About You? It’s Not Practically Your Money Once you retire is the prime-time show to ensure you leave a significant legacy, personally and financially. This financial planner recommends 5 actions to construct a bridge in between who you are and how you’ll be remembered.

How One Widow Nearly Lost Out on $213,000 in Social Security Losing your partner typically suggests losing 30% to 50% of your home income. This monetary adviser highlights that preparing ahead and understanding the guidelines surrounding survivor advantages can assist.