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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

  • 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

Tenant / Lessee

Landlord / Lessor

Ground Lease Basics

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.
Sample Economics

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

Ground Lease Advisory 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
Sample Ground Lease Calculator​

CASE STUDIES

$15.5MM Land Acquisition | Lady Lake, FL
Acquisition

$15.5MM Land Acquisition | Lady Lake, FL

Eyzenberg & Company structured and arranged preferred equity and senior debt to capitalize the purchase and pre-development of 50 acres in Lady Lake, FL. Challenges The newly formed partnership was in the process of executing its first acquisition, involving a large, multi-use land parcel segmented into five distinct development zones. Pre-development financing typically carries low

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$54MM MULTIFAMILY ACQUISITION | INDIANAPOLIS, IN
Acquisition

$54MM MULTIFAMILY ACQUISITION | INDIANAPOLIS, IN

Eyzenberg & Company arranged a structured equity solution for the acquisition of a 314-unit multifamily property in Indianapolis, IN. Challenges Navigating the joint venture initially was relatively smooth, given that it was part of a programmatic execution between the developer and the equity capital provider. However, the closing process encountered significant complications due to a

Read More »
$116.2MM TOWNHOME RESORT COMMUNITY DEVELOPMENT | MAMMOTH MOUNTAIN, CA
Construction Loan

$116.2MM TOWNHOME RESORT COMMUNITY DEVELOPMENT | MAMMOTH MOUNTAIN, CA

Eyzenberg & Company arranged senior secured debt from an EB-5 center for the construction of two adjacent luxury townhome resort communities, totaling 73 units, in Mammoth Mountain, CA. Challenges The sponsor was mid-way through the first phase of a multi-phased construction project with an in- place capital stack but seeking a more efficient and optimal

Read More »
$33.3MM Build for Rent Recapitalization | Myrtle Beach, SC
Bridge Loan

$33.3MM Build for Rent Recapitalization | Myrtle Beach, SC

Eyzenberg & Company arranged a senior secured bridge loan to recapitalize a mid-lease up 82 unit Build for Rent community in Myrtle Beach, SC Challenges The Sponsor was seeking to recapitalize the property to cover a higher than expected interest reserve requirement for the senior construction loan due to increases in SOFR. Furthermore, any extension

Read More »

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