Eyzenberg GroundCap originates, structures and acquires leased fee positions in tandem with our institutional investment partners.
We are seeking opportunities to create and purchase leased fee positions, subject to long-term ground leases, on existing income-producing real estate in primary and strong secondary markets. Most asset types are acceptable, with a minimum investment of $10 million and no maximum. If requested, Eyzenberg & Company can assist the seller/developer in obtaining the most competitive leasehold financing available in the marketplace.
What is a 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
A sale makes sense because land under an existing building is a non-accretive asset providing no means to drive its value.
- 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
The general economic benefits of a bifurcation transaction include:
- In a refinance/recapitalization scenario, the leased fee seller repays existing debt and repatriates equity while continuing to benefit from the future upside of the operating asset by continuing to own the leasehold
- In an acquisition or development scenario, the leasehold buyer/owner achieves higher “all-in” leverage utilizing a ground lease/leasehold financing combo at a lower blended cost than a senior/mezzanine loan option
- Unlike a traditional senior/mezzanine stack where all debt usually expires coterminously, a ground lease provides low-cost permanent capital with no immediate balloon risk
- Tax-advantaged execution allows the leaseholder to depreciate 100% of the leasehold improvements (land is not depreciable) and deduct 100% of the ground lease rent (unlike the amortization portion of a loan)
Typical Terms and Structure are as follows:
- 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