David Eyzenberg, principal of Avison Young’s capital markets group and an adjunct professor of real estate finance and investment at New York University, told Commercial Observer about his growing stake in ground leases. The Russian-born, Brooklyn-bred executive recently co-founded a private equity venture to create and purchase ground lease fee positions. That venture, he said, is part of an ongoing effort as the market presents more opportunities tied to long-term lease deals.
Commercial Observer: Where did you grow up and how did you get started in commercial real estate finance?
Mr. Eyzenberg: I moved to the U.S. from Russia in 1980 and grew up in Brooklyn. While attending NYU for my undergrad, I joined Sopher Realty as a residential rental agent to pay for tuition.
What does your role as the principal of Avison Young’s capital markets group entail?
I oversee a team responsible for the origination and execution of real estate investment banking transactions. My primary focus is assisting owners, developers and operators to efficiently access debt, joint venture and structure capital from the institutional investor universe.
You’re also an adjunct professor at the NYU School of Professional Studies Schack Institute of Real Estate. What are the main subjects you help teach?
I have spent 11 years teaching advanced finance and investment analysis courses in the graduate program. It has been incredibly rewarding getting to know students throughout the years, some of whom I’ve hired to work on my team.
You recently started a private equity venture with Anika Equities to create and purchase ground lease fee positions. How does that platform work in layman’s terms?
I had dabbled in the ground lease space for years, but was looking to get more active as I saw the looming opportunities. I partnered with a longtime friend who was also active in the ground lease arena and we established Anika Equities GLF—a subsidiary of Anika Equities—to pursue the strategy. I view Anika as another arrow in my Avison Young quiver as I go out to raise capital for my clients.
A ground lease is 100 percent loan-to-value, long-term [50- to 99-year], non-recourse financing for the land component of a property. We allocate 30 to 45 percent to the land component of a building and acquire it at a discounted cap rate, relative to the property’s stabilized cap rate. Post-acquisition, Anika takes an unsubordinated fee position and the original owner maintains leasehold ownership of the improvements. The leasehold owner then pays ground rent at a fixed cost with set steps.
What are the benefits of doing ground lease deals in 2015?
In a refinance or recapitalization scenario, the seller or leaseholder repays existing debt and repatriates equity while continuing to benefit from the future upside of the operating asset. In an acquisition scenario, the seller or leaseholder achieves higher “all-in” leverage utilizing a ground lease or leasehold financing combo at a lower blended cost than a senior or mezzanine loan option.
Unlike a traditional senior or mezzanine stack where all debt usually expires conterminously, a ground lease provides low cost permanent capital with no immediate balloon risk. Tax advantaged execution allows the seller or leaseholder to depreciate 100 percent of the leasehold improvements and deduct 100 percent of the ground lease rent.
What are the best geographic markets for these kinds of deals?
We prefer infill or strong suburban locations, avoiding rural areas. The structure is actually more accretive in markets where assets trade at 5.75 percent caps or better. In low cap rate markets we may be buying at a 150 to 200 basis point discount. But in higher cap rate markets we may be at 300 basis points or more below the stabilized cap rate, creating substantial arbitrage returns for sellers of the ground.
I’ve heard some real estate buyers, especially foreign investors, are hesitant to do ground lease purchases, since they never completely own the property. Is that a reasonable concern?
My usual response is “so what?” There is no component of operations that you are more efficient at when you own the land. Elevator repairs and heating costs don’t change. All of the alpha that operators create stems from the improvements, not the land. I also point out that at the end of the hold period, you don’t own the property anyway, since you sold to exit. I suppose someone can take a generational view of hold to maturity, but at that point your increase in current return has more than made up for not owning really old improvements at the end of the lease term.
I think a lot of the perception stems from bad press of people getting hurt by buying leaseholds subject to legacy ground leases. The fair market value reset can be painful, which is why we categorically avoid inserting the clause into our leases.