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	Benefit	Challenge
Sell	One time capital infusion with clean exit	Incur capital gains tax Exercise a 1031 exchange within a finite window Find a viable replacement property
Develop	Own an income producing asset operating at highest and best use	Placing your equity at risk Construction Risk: Including execution, cost overruns, change orders, etc. Market Risk, including lease-up, timing the market, cap rate expansion, financing risk etc.
Joint Venture	Realize a return on invested land equity by leveraging an experienced partner's expertise	Placing your equity at risk , and balance sheet requirements for financing Partnership Conflict Market risk, including lease-up, timing the market, cap rate expansion, financing risk, etc.
Hold	Asset Appreciation	Trapped equity Increasing carrying costs (e.g. property taxes, insurance, etc.) Missing a development cycle
GROUND LEASE	Low volatility / management income producing asset Long term inflation hedge Highly financable Multiple liquidity options	Proper structuring Identifying and negotiating with a viable leasehold developer Procuring capital familiar with ground lease structures

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

Estate planning

Ground Lease Basics

what is ground lease

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

Tenant / Lessee

Landlord / Lessor

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

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

Option 2: Ground Lease

EyzenCo Process and Timeline

1

Size ground lease to determine the maximum viable rent payment using multiple sizing criteria (ground rent coverage ratio, percentage of fee simple value, spread between yield on cost and residual cap rate, spread between fee simple value and bifurcated value)

2

Package offering memorandum and financial model for distribution to potential lessees

3

Conduct a comprehensivedeal placement process to identify and screen potential lessees

4

Establish a call for offers date after all information has been distributed

5

Work with each bidder to submit a proposal outlining their proposed economic ground leaseterms

6

Create a quote matrix featuring a calculator to rank the proposals based on which deal is the most economically advantageous for the fee owner

7

Select bidder

8

Work with the lessee, lessor, and respective legal teams to provide the necessary agreements to formalize the ground lease. The two governing documents are the Agreement to Lease and the Ground Lease itself. Provide guidance to all parties to ensure the agreement is not only mutually beneficial, but also allows both parties to finance their bifurcated positions to maximize returns.

9

The terms of the Agreement to Lease determine the timeline and economics for ground lease based on entitlements etc.

10

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

The below graph and accompanying chart is an illustrative example of the pricing comparison we provide to a client upon receiving competitive bids from potential lessees on ground lease terms. The ground rent for each bidder, plus any proposed fixed step increases, resets, security deposits, etc. are input into our propriety calculator, where we determine the net present value of the proposed cash flows for each bid and rank them based on economic attractiveness to the client

Case Studies

Student Housing - Chapel Hill, NC

• Development of a 348,886 SF, 339 Unit student housing community to be built one third of a mile from the University of North Carolina, Chapel Hill campus. The development, to be built by Greystar, is situated on 12.3 acres and will accommodate 850 student beds and feature a full amenity package including swimming pool, fitness facilities, roof deck, five-story parking garage

• 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

• Development of an approximate 400,000 SF, 350 Unit residential complex community with 640 parking spaces. The development is situated on 11 acres and is part of a larger, fully entitled 68-acre site slated for a master planned mixed-use complex.

• 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

• Development of a 517,000 SF, 424 Unit student housing community to be built near Virginia Tech by Greystar. The property is situated on 11.5 acres and will accommodate approximately 1,040 Students

• 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