Safehold Helping Owners Drive More Proceeds at Lower Cost in Post-Pandemic Market

Partner Insights spoke to Jay Sugarman, chairman and CEO of Safehold, a publicly traded real estate investment trust that is creating meaningful economic opportunities for building owners and investors with a reinvented ground lease structure. The firm has been in business only since 2017 but has already amassed a portfolio valued at $6.5 billion while working primarily in the top 30 metropolitan statistical areas (MSAs) in the country.     

Commercial Observer: How do you think about the challenges owners, operators and developers are facing in this current environment? 

 Jay Sugarman: I think the pandemic shock wave is still being felt throughout the market. What we’ve seen are higher levels of uncertainty and volatility across different marketplaces in terms of consumer behavior, government behavior, geopolitics, along with supply and demand.  There’s just a lot of uncertainty and volatility post-pandemic. 

 Safehold’s long-term capital really helps offset that increased volatility.  It’s a perfect environment for the modern ground lease structure that Safehold has created. We can help stabilize and anchor capital structures, which gives our customers the time they need to do what they do well — optimize the operating side of their multifamily, hotel or office leasing project.

How does Safehold fit into modern commercial real estate financing?

Real estate is a massive user of capital, so if you can come up with a system that delivers more proceeds with lower costs and more efficient structures, the market will come to you. 

 Commercial real estate historically looked at ground leases as difficult to work with — and for good reason. They were previously non-institutional and non-standardized financial instruments. In the old model, everyone had a different provision for different parts of the ground lease. We’ve standardized and institutionalized the structure to benefit the entire capital stack, so that the more people use them, the more comfortable they become.

 If you show the financial world a better capital solution, you’ll create opportunities. 

 Safehold’s portfolio has grown to over $6.5 billion across more than 140 transactions. What are the common threads among the deals you’ve closed?

 We’re working primarily in the top 30 MSAs around the country while mainly focused on large properties valued anywhere from $30 million to $1 billion.  

 We’ve worked across most product types, though I would say multifamily, in all its flavors, including apartment projects, student housing, age-restricted and income-restricted housing, works particularly well with our modern ground lease model. 

 We’ve also done deals in the office, hospitality and life science segments. Really, any product type that you see in a major urban location or near an urban location can benefit from a modern ground lease.

 What competitive advantages do Safehold unlock for building owners?

 We compete with other sources of traditional financing for owners, operators and developers, including mortgages, mezzanine and preferred capital, yet we also work harmoniously with each of them to offer our clients the lowest cost of capital and highest proceed solution. That’s the main competitive advantage we offer. We also think this modern ground lease is more efficient from a transaction cost perspective. We’ve structured it in a way that makes it more seamless today and in the future. 

 To give one example, when somebody’s developing a brand-new building, we generally offer a much lower cost of capital with a maturity profile that is much safer for a developer that may be considering taking on a short-term, floating-rate construction loan that could blow up on them in a couple years. We all know that construction can take time. Markets can change. It absolutely makes sense to us that you should pair that kind of operating risk, development risk, with a capital structure that is long-term, low-cost and very stable. 

You recently announced a series of affordable housing transactions. Why is Safehold’s ground lease model so attractive to affordable housing developers?

 I’m really excited about what we can do in the restricted-income, affordable housing area. Our ground lease structure helps to maximize the efficiency and impact of government resources, fill capital structure gaps for our customers, and ultimately provide more housing. In the affordable space, there’s a limited pool of Low-Income Housing Tax Credits and bond capital that’s capped every year. It’s a scarce resource. You can use these resources to capitalize the whole project, or you can use them to capitalize just the building and let us capitalize the land separately for you. This is, in effect, a way to maximize the efficiency of the traditional funding sources and, for our customers, to drive more proceeds and bridge gaps in their budgets. That’s a big win for our developers. It’s a big win for the local governments, and a big win for society. 

We think there’s a big opportunity to help chip away at this housing shortage, and provide more affordable housing, without having to materially change the ecosystem that already exists. We’re going to take what exists and make it better.

 How would you characterize the opportunity for Safehold in the years to come?

 Commercial real estate is a huge industry that we want to make better and more efficient. If we can do that, or I should say, when we do that, we will build an irreplaceable portfolio of great land in the top cities in the United States. History tells us that will prove to be a very compelling, if not extraordinary investment. So, for us, it all starts with making the industry more capital efficient, and we think the modern Safehold ground lease does that. 

 We still feel like we’re learning. We’re still trying to understand how we can grow the ground lease industry to $500 billion. We’re only a few steps along that journey. But at its core, what I’ve seen over 30 years is, if you bring a better solution to the industry, it will be adopted, and it will be adopted at scale. We intend to be a big part of that future.