Ground Lease Advisory
Helping property owners Monetize their Equity Utilizing Ground Leases
Our Promise
We will increase the value of your asset compared to the conventional methods of monetizing a land or property investment by: 1) creating a properly structured ground lease, 2) identifying a viable lessee, 3) arranging all necessary capital, 4) advising on the transaction, and 5) presenting liquidity options for your ownership position.
Option
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Benefit
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Challenge
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Sell
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One time capital infusion with clean exit
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Develop
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Own an income producing asset operating at highest and best use
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Joint Venture
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Realize a return on invested land equity by leveraging an experienced partner's expertise
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Hold
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Asset Appreciation
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GROUND LEASE
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Low volatility / management income producing asset
Long term inflation hedge Highly financable Multiple liquidity options |
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Why Create a Ground Lease
Value creation
- The predictable cash flows of a ground lease attracts a wider pool of fixed income investors willing to pay more than the typical land buyer
- A properly structured ground lease will be valued substantially highen than the land itself, by approximately 1.5x to 3.0x
- Properly structured ground leases consist of base rent with escalations, resulting in real-time land value apprciation, and protection from inflation
Senior secured
- Ground rent is senior to leasehold debt payments and is among the most senior of property level expense obligations (second only to property taxes)
- In the default scenario, the leasehold lender may advance rent and expense payments to protect their loan
- In the event of a default, the landowner may take possession of the property
- At the end of the ground lease term, the improvements revert to the leased fee position
Tax efficient
- A leased fee owner can monetize their ground rent income stream by financing their newly created fee position. This provides the benefits of a sale-like capital infusion in the form of loan proceeds, which are untaxed
- Unlike an outright sale, a properly structured ground lease does not trigger a capital gains event
Estate planning
- Ownership is primarily passive with activity only involving approving major improvements or rent escalation/resets
- Risk mitigation by limiting leverage and utilizing self amortizing debt
Ground Lease Basics
what is ground lease
- The most common form of ownership of a real estate asset is fee simple ownership, whereby one owner owns both the land and the improvements. However, fee simple ownership can be bifurcated, creating two distinct interests. 1) the leased fee position (land) and 2) leasehold position (improvements/building). A ground lease is the legal document that dictates the relationship between the two ownership interests.
The basics
- The two parties enter into a long-term lease. Usually, but not always, 99 years
- The leasehold position owns the vertical improvements (or the right to develop them) and as such, is entitled to all income generated from operations of the building, and is responsive for all associated operating expenses
- In addition, leasehold position pays-ground rent to the leased fee position
- Upon expiration or default under the terms of the ground lease, the improvements revert back to the leased fee owner.
ground lease strike zone
- Land or under improved property
- Ideal characteristics of candidate properties
- Zoned for: traditional asset classes with a preference for residential, multifamily-majority mixed use, and student housing.
- Geography: primary and secondary markets
- Location: Urban or suburban, with growing population density
- Size: Land value in excess of $10MM
- Attributes: that creates challenges
- Asset Class: special purpose, entertainment themed or religious
- Geography: markets with stagnant or declining population and economic activity
Ground Lease Timing
A ground lease can be structured at almost any stage of the development or entitlement life cycle. Each stage requires special considerations with
respect to the amount and timing of ground rent. Ground leases can be effectuated at any of the below stages:
PRE-ENTITLEMENT
- During pre-entitlement, some or all of the governing documents of the ground lease can be executed with soft deposits posted upon entitlement pursuit
- Due to the inherent entitlement risk, there will be provisions in the documents that allows both parties to walk away should the pursuit of entitlements be unsuccessful. However, to incentivize the lessee to successfully obtain entitlements, it is customary to negotiate into the agreement that they front all of the entitlement costs, and must forfeit their deposits should they choose to walk away
- During this time, the landowner does not receive any ground rent, and only holds a deposit in escrow
- The economic structure of the ground lease will be tied to a percentage of the anticipated income
POST SITE PLAN APPROVAl
- It is common for ground lease execution to coincide with site plan approval
- At this stage, the lessor receives any up-front deposits agreed to
- If ground rent commences during construction, most lenders will treat it as a capitalized line item expense, thereby providing surety of payment to the lessor
- The leased fee loan will be sized using a cap rate on ground rent income
POST – ENTITLEMENT / PRE-SITE PLAN APPROVAL
- Entitlement deposit goes hard and lessor may or may not receive ground rent the anticipated income
POST DEVELOPMENT
- A ground lease can also be structured on a newly completed development site
- Ownership group can choose one of two options:
- Retain the fee position and sell off the leasehold position
- Retain the leasehold position and sell off the fee position
- Both positions can then be financed for a one-time capital infusion
Things to Consider
A viable and financeable ground lease must address multiple considerations, including:
Rent
- Ground rent coverage ratios: differ depending on asset class to account for the volatility and operating expense variability.
- For retail, office, industrial & warehouse properties, ground rent should be not greater than a set percentage of effective gross income (“EGI”)
- For multifamily, self storage, ground rent should be not greater than a set percentage of net operating income(“NOI”)
- Rent escalation: should be structured to protect owner from inflation while minimizing future economic ambiguity for the lessee. Escalation structures can include a combination of the following: fixed steps, CPI adjusters (with or without caps and lookback resets), percentage rent, fair market value resets, or flat/ramp up
Financial
- Leasehold Financing: Ground leases are structured to accommodate current balance sheet, agency and securitization requirements enabling leasehold positions to be easily financed
- Leased Fee Financing: Will be sized using a cap rate applied to ground rent income, taking into account fixed step increases and any resets
- Buy-back Options: Deals can be structured and priced to allow the lessee to purchase the leased fee at some point in the future. The buy back price can be based on a pre-determined multiple on the income at certain dates in the future or a return-based lookback requirement
- Credit enhancements: Additional protections, during development, for the lessor can include cash or a letter of credit held until completion to prop up the lessee's completion guarantee
structural & legal
- Lessee’s completion guarantor requirements (net worth and ongoing liquidity requirements) and obligations for development scenarios
- Casualty and Condemnation Proceeds - address allocation of proceeds, requirements and timing to rebuild, calculation of FM and priority claims.
- Guidelines and approvals for future alterations should be pre-negotiated to prevent the impairment of the ground lease value
- Define adequate standards for an institutional leasehold lender (minimum capital base) and leasehold owner (assets under management) to avoid a potential degradation of value
- Though most ground leases are structured as unsubordinated (the leasehold mortgage does not encumber the land),there may be situations during development, that a lessor can generate additional economics for themselves by agreeing to a subordinate
Sample Economics
Option 1: Sell
- Sell Land for market value of $10 million, incurring capital gains taxes
Option 2: Ground Lease
- Lease the land to developer for approx. $720,000 per year
- Leased Fee land value is now $19.2 million (1.92x land value), using industry- wide valuation metrics
- List Item
- Finance your Leased Fee position to receive $12.5 million in loan proceeds (65% LTV), which are not taxed. Loan payments are fully amortizing and serviced by the ground rent revenue. After the loan is paid off, the remaining upside is yours to keep.

EyzenCo Process and Timeline
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Upon ground lease execution, Eyzenberg & Company can arrange financing to lever your newly created fee position via insurance company, bank, CMBS or CTL execution
Sample Timeline

Sample Ground Lease Calculator

Case Studies
Student Housing - Chapel Hill, NC
• Eyzenberg &Company was retained by the landowner to identify a developer for the proposed community, as well as structure and arrange a 99-year ground lease. Additionally, EyzenCo arranged leased fee financing for the landowner, at a valuation that reflects a better yield on cost than if the land were to be purchased outright.

Multifamily – Bonita Springs, FL
• Eyzenberg &Company was retained by the land owner to identify a developer to develop the proposed community, as well as structure and arrange a 99-year ground lease. The landowner is currently under LOI with a private real estate investment company based in Maryland, and the parties are undergoing due diligence and ground lease negotiation prior to a close.

Student Housing - Blacksburg, VA
• Eyzenberg & Company was retained by the landowner to identify a developer to develop the proposed community, as well as structure and arrange a 99-year ground lease. Additionally, EyzenCo arranged leased fee financing for the landowner, resulting in a complete cash-out at attractive loan terms
