Eyzenberg GroundCap
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
