How Safehold’s Ground Lease is Unlocking Multifamily Development

Multifamily development has been difficult to capitalize in recent years, with equity scarce and targeting elevated yields in the face of rising construction costs and interest rates. Against this backdrop, Safehold’s modern ground lease offers a structural advantage, serving as an innovative new capital structure tool in a market environment that requires creativity. By introducing low-cost, 99-year ground lease capital priced at highly accretive levels (well inside of equity yields and the cost of conventional debt), developers are able to manufacture significantly higher returns and move projects forward.  

Safehold’s ground lease capital helps to drive a higher return on cost and, when paired with leasehold financing, a lower blended cost of capital and reduced equity requirement. This translates into materially improved round-trip returns. 

None of this works without a ground lease that lenders and future buyers can underwrite; specifically a 99-year term, fixed rent increases, and a form of lease that’s readily financeable and saleable.

The innovation of the modern ground lease

Older ground leases developed a fair reputation for being uneconomical, often carrying fair-market-value rent resets, variable rent provisions and other terms that were unfavorable to leasehold owners. Leasehold positions under those structures were difficult to finance and often traded at a discount relative to fee-simple transactions.

Modern ground leases were developed to address those issues directly: predictable rents and a highly financeable legal construct, ultimately helping leasehold positions to trade at comparable cap rates to fee simple. Safehold pioneered the modernized structure in 2017, creating a new category of long-term capital designed to unlock value and enhance sponsor economics.

Since then, the company has partnered with multifamily developers across the country. Safehold’s portfolio now spans over $7 billion across 165-plus assets, with 105 leasehold owners and more than 60 unique leasehold lenders, along with a growing sense of familiarity and adoption throughout the US. 

Supporting multifamily development from coast to coast

Two recent transactions illustrate how ground leases have helped multifamily developers in a higher interest rate environment across the country.

Late last year, Safehold provided a ground lease to Riaz Capital for the development of a 259-unit, eight-story multifamily project in Downtown San Diego. The structure helped to drive a higher return on cost and a significantly lower blended cost of capital, enhancing the overall return profile for Riaz’s Qualified Opportunity Zone investment strategy. 

On the East Coast, Safehold provided Samuels & Associates and Mark Development a ground lease for the development of a 204-unit multifamily project in the Somerville area of Boston. Similarly, the ground lease structure helped to drive a materially improved return on cost and enhanced round-trip returns, providing a path for the sponsorship team to break ground. 

Different markets and sponsors, same structural advantage: a ground lease paired with leasehold debt delivered the enhanced economics each project needed to move forward.