Ground lease capital
The institutional market for ground lease capital has evolved into a viable alternative capital structure for CRE transactions. Eyzenberg & Company has a proven track record of providing sophisticated advisory services for bifurcation transactions. Our innate familiarity as both a principal and intermediary in the space allows us to craft the most efficient leased fee and leasehold financing solution for clients seeking a more structured capital stack.
What is Ground Lease?
A ground lease is a document that memorializes the relationship between a leased fee owner “the landlord” (owns the land) and the leasehold owner “the tenant” (owns improvements/building sitting on the land)
The land is leased by the landlord to the tenant on a long-term basis
The tenant owns and operate the vertical improvements and is responsible for all expenses including; operating, taxes, insurance & maintenance
Upon expiration or default under the terms of the ground lease the improvements revert back to the landlord
THE CAPITAL EFFICIENCY OF BIFURCATION
Land that is ground leased has a very different risk reward profile than a leasehold property. The leased fee has similar investment characteristics to a long duration, inflation adjusted fixed income investment vs. an entrepreneurial operating asset like the building above. Therefore a bifurcation allows for a better match of investment capital commensurate with a given risk profile (opportunistic short durations vs risk averse long duration) that potentially results in a lower blended cost of capital (the same thesis that drives securitization).
There are no specific benefits to operational efficiency stemming from owning the underlying land.
Revenue is in no way impacted by land ownership under an operating asset.
Unless the property is a near term development site, all future land value increases will simply be a byproduct of NOI growth producing a larger total asset value where land is a remainder interest.
ECONOMIC BENEFITS OF A BIFURCATION TRANSACTION:
Lease structure – unsubordinated ground lease
Lease term – generally 99 years, but can be shorter depending on jurisdiction and tax implications
Purchase price – approximately 20% – 35%+ of the total property (fee simple) value
Pricing – 3.65% – 5% cap rate depending on a number of factors, including location, asset class, age, percentage of total value, coverage, etc…
Ground rent – triangulated from a number of variables including a premium to the stabilized cap rate of the underlying asset and a target 3x – 5x NOI coverage ratio (depending on asset class and deal specifics)
Rent escalation – flexible options include fixed steps, CPI adjusters (with or without caps and lookback resets), percentage rent or flat/ramp up options
Buy-back options – deals can be structured with options priced in
Leasehold financing – ground leases are structured to accommodate current balance sheet and securitization requirements enabling leaseholds to be easily financed