From the Desk of Professor Eyzenberg
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)
Select completed transactions
Spotlight on Select Programs
Eyzenberg & Company is the preeminent firm advising owners and tenants on structuring viable and financeable ground leases. A ground lease is a special financial product requiring a confluence of skillsets and knowledge base that is not currently present among the disparate business verticals of most real estate firms.
Due to our experience as both a leased fee principal investor and investment banker focused on capitalizing leased fee and leasehold positions, we have the requisite capabilities to structure ground leases for any scenario
- Preferred post-entitlement or with site plan approval
- Pre-entitlement is possible but will require additional structure due to the ambiguity of the final product
- Student Housing
- All other commercial properties are acceptable but less desirable in today’s market
- Multifamily or Multifamily-majority Mixed Us
Major Financial Issues to Consider
- Subordinate vs. non-subordinate
- Valuation of land vs. ground lease
- Capitalized basis of starting ground rent
- Various ground rent overage ratios (will vary dependent on asset class)
- Completion guarantor requirements and obligations for development scenarios
- Control and allocation of condemnation and casualty proceeds
- How to structure rent escalations to protect owner from inflation
- How to structure rent resets that lack economic ambiguity and do not create asymmetric risk for either party
- Valuation options for future changes in the development site
- Timing of future economic changes to the ground rent payment stream and their effect on the net present value
Select Deals in the Market Seeking Capital
$55MM | SFR | Recapitalization | Myrtle Beach, SC
$63MM | Retail | Acquisition | Las Vegas, NV
$58MM | Multifamily | Development | Fort Myers, FL
Select Deals Seeking Developers
$21MM | Multifamily | Development | Panama City
$45MM | Multifamily | Development | Pensacola, FL
428-Unit Leasehold Development
$97MM | Multifamily | Development | Miami, FL
Real Estate Capital Alliance (RECA) Q2 2022 Production Statistics
Eyzenberg & Company is a proud member of the Real Estate Capital Alliance (reca.us). RECA members arranged over $4 billion in capital in 2020. Below are the complete RECA production statistics for Q2 2021.