We are indisputably living in interesting times. In every cycle, the (insert your choice here) pendulum tends to swing wide causing uncertainty. Today, we are living through a disruption of the economic status quo due to the pandemic, social unrest/engineering, and questionable monetary policies. And yet, the band plays on as transactional appetite – if not volume – is at all time highs.

Institutional investors with actuarial return requirements do not have the luxury of sitting this one out; everyone must play. Private investors sitting on holdings continue to have the option of: do something (sell, joint venture, or build) or do nothing.

The choice becomes more difficult for those sitting on low or non-income-producing land. For this asset class, doing something is replete with multiple pitfalls: taxes today or facing a potential future loss of 1031 benefits, entering into a partnership with a risk exposure many do not understand or know how to underwrite, or facing a daunting task of developing something for the first time. Nevertheless, doing nothing doesn’t look so great either; trapped equity with a potential 1031 expiration is (in today’s political climate) a real risk, as are carry costs potentially increasing as property taxes are expected to rise in many states suffering from deficits (topic for another day).

An emerging option is a modernized version of the ground lease. An owner seeking to avoid a lump sum tax payment, avoid development or partnership exposure, or one who simply wishes to create a passive income vehicle can retain their interests in a leased fee ownership position while a more entrepreneurial party takes over as a lessee.

Ground leases are complicated instruments to begin with and have even more idiosyncrasies on development deals. Throw in the broad spectrum of potential deal cycles (pre/post entitlement or pre/post site plan), and you have a lot to unpack.

Our company is the market leading ground lease advisory firm with a track record of success representing land owners. We have structured multiple ground lease transactions with institutional counterparties and believe strongly that for many, it is the single best option to monetize a land position. A little-known secret is that land once subject to a properly structured ground lease will be valued closer to a fixed income instrument and, as such, will trade at a higher value than pure land. There have been cases wherein buyers not able to negotiate a reasonable price with sellers have turned to us to structure a win-win situation using a ground lease.

– David Eyzenberg (Adjunct Professor at NYU Schack & UM Herbert Business School)