New Opportunity for CRE Investors With Modern, Flexible Ground Leases

Recently, ground leases have become a much more, widely used investing tool for developers and sponsors, especially as modern ground lease structures provide more flexibility, more predictable funding and less risk. Far from the inflexible arrangements of the last century, today’s ground leases extend asset values and provide capital agility for today’s diversified real estate players across property types — from multifamily and office to industrial, hospitality and retail.

Haven Capital is leading the transformation of the ground lease into an owner-friendly strategy suited to the rapidly shifting commercial real estate landscape of today.

“Ground leases marked by onerous rent resets are becoming a thing of the past,” said Joe Shanley, head of acquisitions for Haven Capital. “As a more experienced and nimble ground lease provider, we can structure deals that offer long-term funding with predictable cash flows that allow owners to leverage what is, traditionally, the lowest-yielding portion of their asset — their land. Importantly, we are also the only major player that offers an option to repurchase the land.”

This flexibility provides 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 internal rate of returns, 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 percent 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, who can deduct the ground rent payments from net operating income, which reduces 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 an asset and unlock the full capital potential of the entire asset to drive an investor’s real estate strategy forward.

“At a time when lenders are being more conservative, ground leases allow owners and developers to stay agile,” said Hal Pohl, head of West Coast acquisitions for Haven Capital. “It is also bringing new players into the fold across the full spectrum of asset types.

The enhanced flexibility provided by modern ground leases is drawing new entrants into the sector, in the forms of new investors and sponsors, but it also is becoming noisier with newer, smaller operators, who may not have the experience to structure the right types of deals for these clients.

Such smaller-scale operators present a new area of risk for ground leases. Experienced, ground lease providers — who can navigate institutional and agency-level lenders — are crucial to ensuring optimal future performance, especially with ground leases becoming more prevalent within the commercial mortgage-backed securities (CMBS) market.

In this new era for ground leases, commercial real estate investors on both sides of the table can benefit from increased asset values and reduced capital costs. However, only a nimble and highly experienced, ground lease team with diversified capital and investment experience can act as a partner to deliver bespoke strategies on owners’ investment aims.