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, const 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 |
About us
EYZENBERG & COMPANY is the market-leading ground lease advisory firm. We
have successfully represented landowners in multiple ground lease transactions
with insti- tutional and private counterparties. In many cases, a ground lease is
the single best option to monetize a land position.
Why Us?
•Unmatched expertise in structuring ground leases
•Ability to ensure execution by bringing capital familiar with ground lease
•Bring liquidity options for your position
Why Create a Grund Lease
Tax efficent
- A leased fee owner can monetize their ground rent income stream by financing their newly created fee position. This provides the benefit of a sale-like capital infusion in the form of loan proceeds,which areuntaxed
- Unlike an outright sale, a properly structured ground lease does not trigger a capital gains event
Estate planing
- Ownership is primarily passive with activity only involving approvingmajor improvements or rent escalations/resets
- Risk mitigation by limiting leverageand utilizing self amortizing
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
- 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
- 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
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)
- 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 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
Grund Lease Basics
• 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,butnot 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 responsible 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
• Land or underimproved property
• Ideal characteristics of candidateproperties
• Zoned for: traditional asset classes with a preference for residential, multifamily-majority mixed
use, and student housing
• Geography:primary and secondary markets
• Location:Urban orsuburban, with growing population density
• Size: Land valuein excess of $10MM
• Attributes that creates challenges
• Asset Class:special purpose, entertainmentthemed or religious
• Geography:markets with stagnant or declining population and economic activit
Ground Lease Timing
A ground lease can bestructured at almost any stage of thedevelopmentor entitlementlifecycle.Each stagerequires special considerations with
respect totheamount and timing of groundrent.Groundleases can beeffectuatedatany of thebelowstages:
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 depositin escrow
• The economic structure of the ground lease will be tied to a percentage of
the anticipated incom
Post Site Plan Approva
• 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 commenc es 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 notreceiveground rent the anticipated incom
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:
$100MM+ STUDENT HOUSING LEASEHOLD DEVELOPMENT | BLACKSBURG, VA
$95MM MULTIFAMILY LEASEHOLD DEVELOPMENT | BONITA SPRINGS, FL
$100MM+ STUDENT HOUSING LEASEHOLD DEVELOPMENT | CHAPEL HILL, NC
The Eyzenberg Advantage
Market leading authority on ground leases, providing superior “Cradle to Grave” Execution
- Formulaic marketing process, honed through many years of capital
- Superior expertise structuring the ground lease
- Can recommend or work with specialized attorneys to create and negotiate the Ground Lease and other related document
- Founder has served on several occasions as an expert witness for complex ground lease litigation
- The president and seniorstaff members are adjunct professors teaching graduate level real estate courses at various institutions including; Columbia, NYU Stern and Schack, University of Miami, Fordham. Well over 7,500 students during their collective 55 years havelearned about the benefits of ground leases in a capitalstack
Can deliver multiple monetization options for Lessor once ground lease is created
- EyzenCo can arrange IO or self amortizing debt from traditional sources, such as insurance company, banks, CMBS
- EyzenCo can structure and arrange long-term max leverage CTL financing for your fee position
- EyzenCo can acquire your fee position for max proceeds via an associated institutional entity
Can deliver multiple monetization options for Lessor once ground lease is created
- EyzenCo can arrange IO or self amortizing debt from traditional sources, such as insurance company, banks, CMBS
- EyzenCo can structure and arrange long-term max leverage CTL financing for your fee position
- EyzenCo can acquire your fee position for max proceeds via an associated institutional entity
Capital Markets Relationships
- Since its founding, the principals and seniorstaff of Eyzenberg & Company have executed over $1B of capital market transactions and over $20B on prior platforms
- Experience across the entire capital spectrum provides in depth understanding on how a ground lease can fit into a particular opportunity
- Over 20 originators conversantin theground leasestructur
- Can bring the leasehold developer through Eyzenberg’s core competency, the capital markets advisory platform
- Can bring debt capital to the table for leasehold developer, providing a surety thatthey can execute
- Can refinance any in-placedebt or futuredebt instruments
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
- 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
-
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)
-
Package offering memorandum and financial model for distribution to potential lessees
-
Conduct a comprehensivedeal placement process to identify and screen potential lessees
-
Establish a call for offers date after all information has been distributed
-
Work with each bidder to submit a proposal outlining their proposed economic ground leaseterms
-
Create a quote matrix featuring a calculator to rank the proposals based on which deal isthemost economically advantageous for thefee owner
-
Select bidder
-
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 positionsto maximize returns.
-
The terms of the Agreement to Lease determine the timelineand economics for ground leasebased on entitlements etc.
-
Upon ground leaseexecution, Eyzenberg &Company can arrangefinancing to lever your newly created fee position via insurancecompany, 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 abetter yield on costthan iftheland wereto 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
