Modern Ground Leases Finance Growth Through Flexibility

What is a ground lease?

The ground lease is more commonly used than one might think. It leverages the value of your land — typically the least revenue-generating segment of your assets — by separating ownership from that of the building and other improvements constructed on the land. Widely used by well-known national chains, such as Starbucks and McDonald’s, this arrangement traditionally provides access to well-located land that would not be available for purchase.

In a ground lease, the land is purchased and leased back to the building owner for a period of usually 49-99 years. Historically, these leases were inflexible and made it difficult for the building owner to finance or sell their property, as well as could entail expensive resets on the lease terms.

A modern ground lease does just the opposite, providing owners with a very efficient structure to unlock a property’s full potential and increase returns in a way that acts similarly to traditional financing. Using your ground as leverage, Haven Capital’s platform also provides a crucial distinction: a flexible buyback option that allows owners to repurchase their land fee at a time that makes sense for their business. This repurchase option fundamentally changes the way the leasehold is underwritten, when compared to historical ground leases and other products that don’t offer this flexibility.

What are the advantages of Haven ground leases?

Ground leases provide many advantages to developers and owners as they look to capitalize their investments. Most notably, a ground lease can provide the liquidity to recapitalize, reposition or renovate a property, as well as fund further acquisitions and developments. The reduction in equity requirements provided by a ground lease translates into higher cash-on-cash returns, increased overall initial rate of returns (IRRs), and freed-up capital to be deployed to other investments.

A ground lease also provides greater long-term clarity by significantly reducing exposure to the credit cycle; locking in low, long-term interest rates; and eliminating financing maturity risk on a large portion of the capital stack.

The cost savings are also substantial. Typically, owners refinance their properties every five to 10 years and each time pay transfer fees, mortgage taxes, legal fees and other costs of doing business. Those payments, typically associated with 30 to 40% of the capital stack, are removed, reducing equity requirements and improving returns.

On the tax side, ground leases also provide significant benefits to building owners. Though owners do remain responsible for property taxes, with a ground lease, they can deduct the ground rent payments from net operating income, reducing the overall tax burden.

Overall, modern ground leases are an innovative financing option built to empower businesses for the diversified commercial real estate needs of today. Done properly and through a modern, owner-friendly platform like Haven, they are flexible enough to evolve with your asset and unlock the full capital potential of your entire asset to drive your real estate strategy forward.