Newly internalized Safehold unlocking embedded value for building owners

Newly internalized Safehold unlocking embedded value for building owners

4 min read
Aerial of Philadelphia

Building owners and developers are increasingly turning to ground leases to efficiently develop and operate their assets, while mitigating risks posed by fluctuating inflation and interest rates.

Safehold is committed to helping asset owners generate the most value from their properties, even during times of economic uncertainty. In March 2023, the company announced a merger with iStar.

“We’re opening a new chapter in our company’s history,” Safehold Chairman & CEO Jay Sugarman said. “This deal enables an internalization of all of our expertise, while opening us up to potentially new categories of institutional capital, which can ultimately create lower capital costs for customers. It further strengthens our position as the preeminent ground lease company and the creator and leader of the modern ground lease industry.”

Bisnow sat down with Sugarman to discuss the industry’s adoption of modern ground leases, the impact of scaling and how the merger will help provide building owners with greater access to efficient capital.

Bisnow: In the real estate world, how has the perception of ground leases evolved since the company was founded?

Sugarman: The high number of transactions in almost every major city and property type has dramatically increased market familiarity and interest in ground leases. Just as the net lease market became a powerful tool for corporations to maximize value, ground leases are now doing that for commercial real estate.

Historic ground lease structures were very inefficient and usually a bad deal for building owners. To that end, we wanted to create a ground lease that brought value for owners and lowered their cost of capital as well as their risk. The old ground leases had all sorts of out-of-date provisions and vague structures. We standardized the structure and made it more accepted by lenders and buyers, bringing the industry into the modern age with a ground lease that fits seamlessly within today’s capital markets.

Safehold’s portfolio exceeded $6B in 2022. What does this milestone mean in the grand scheme of Safehold’s mission and where it’s headed?

Our company is the only scaled pure-play, publicly traded ground lease company. In 2017, we went public with an approximately $300M ground lease portfolio and we’ve grown almost twenty-fold since then. 

We knew scale was going to be important, as it would allow us to drive down our cost of capital, making our ground leases an attractive source of capital for customers. At our scale, our customers of all sizes can take advantage of the many benefits of modern ground leases. 

We’ve worked with over 50 different lenders who finance the buildings on top of our land, so we know that modern ground leasing is no longer a new concept or something that hasn’t been fully vetted by the industry. More property owners now see it as a powerful tool to maximize the value of what they do well, which is building, operating and managing high-quality buildings in and around the top 30 cities in the country.

What is the significance of Safehold’s merger with iStar? What does it mean to Safehold as well as customers?

The merger simplifies our company. We believe the merger should help us scale faster and make it easier for us to bring down capital costs, which will make the modern ground lease even more impactful for owners, buyers and builders who access this very attractive capital.

What challenges are your clients solving these days and how does Safehold help?

Customers need the most efficient capital they can access today, given the challenges caused by higher interest rates and macro volatility. We can help maximize the value of existing properties by using a ground lease to create the optimal capital structure as well as provide lower-cost capital for people who are developing new properties. In addition, when an owner is selling or buying a property, a ground lease can increase the price for the sellers and the pro forma returns for the buyers. 

It all comes back to this idea that a modern Safehold ground lease can materially enhance the value of commercial property ownership, a radical change from many old ground leases, which negatively impacted value.

What does the future of ground leasing look like?

The net lease business has grown into a multitrillion-dollar business. We think the same economic logic applies to ground leases and we’re excited to be the leader in what should be a large and growing business for decades to come. 

Unpredictable economic headwinds are creating challenging conditions for owners, lenders and buyers to have conviction in their valuations.

This is leading to a lack of liquidity in the capital markets, where owners are hesitant to sell at higher cap rates. Meanwhile, buyers and lenders are reluctant to execute transactions without a clearer sense of the cost of capital in the near term.

Consequently, the commercial real estate industry is at a crossroads, and building owners that have historically focused on traditional fee simple ownership are becoming increasingly open to more efficient capitalization strategies.

As a leader in the modern ground lease industry, Safehold helps asset owners maximize the efficiency of their capital stacks by providing low-cost capital — all while mitigating development and debt maturity risks and generating a strong return profile, said Tim Doherty, Safehold’s recently appointed Chief Investment Officer.

“Existing owners are facing refinancing at higher costs and potentially lower proceeds,” Doherty told Bisnow’s Studio B. “Developers are also seeing lower debt proceeds and higher pricing, and buyers are struggling to meet the bid-ask spread.”

Bisnow spoke with Doherty to learn more about what he is seeing in the market and the advantages of modern ground leases in all economic conditions.

Bisnow: How would you characterize the mindset of building owners and developers in this market?

Doherty: The volatile market has definitely made it difficult for owners, lenders and buyers to have confidence in their valuations, leading to a standstill in the capital markets. Owners don’t want to sell at higher cap rates, and buyers and lenders are not confident where the cost of capital will be in the near term to execute deals.

But we are seeing market transaction volume increase. People are picking their spots and executing where there is liquidity. They’re going after markets where the valuations have changed, but the fundamentals haven’t. Multifamily and industrial are great examples of product types that continue to have strong fundamentals.

Bisnow: Safehold pioneered the modern ground lease. How has the perception of ground leases changed since then?

Doherty: Pretty dramatically. When we started, the market’s perception was very different from what it is today. Before we created the modern ground lease, they were inconsistent, poorly conceived and overly complicated. We provided consistency and simplicity, taking into account the interests of all participants, including lenders and owners.

We’ve now executed over $6B on more than 135 deals across numerous markets and asset classes for different types of capital needs. This includes development, acquisition and recapitalization. It’s one thing to see the hypothetical concept. It’s another to actually see it working in practice and generating higher returns for owners, operators and developers.

With over seven years of track record, we have seen several round trips and refinancings of leasehold positions, which have demonstrated the liquidity of the leasehold position as well as the increased returns for our clients.

Bisnow: What are the key structural advantages of a modern ground lease relative to traditional real estate capital?

Doherty: It goes back to the cost of capital. We’re a low-cost provider, and cheaper than all other CRE capital available. Simplicity, consistency and a low cost of capital allow us to provide our customers with accretive, passive capital to drive better returns.

Leasehold owners benefit from less equity required upfront, eliminating friction costs throughout the term and significantly reducing refinancing risk.

Bisnow: What is your investment team focused on in the near term?

Doherty: In a volatile market, you’re always looking for sectors and deals that are actionable. You’re going into areas that are impacted on the value side, but not the fundamental side. Office has been hit on both, so that’s a very difficult one for people to peg down. You don’t know what your revenues are or what the valuation method is yet.

Residential, including multifamily, student housing and build-to-rent, is the biggest sector we’re focusing on right now because the fundamentals have not changed, even if certain markets might be seeing near-term deliveries.

Existing owners are facing refinancing at potentially less proceeds than they currently have outstanding. This is creating a capital need that can come in the form of fresh equity, such as cash in from the existing owner or new, high-priced preferred equity.

Alternatively, Safehold’s low-cost, highly accretive capital enables owners to create a more efficient, conservatively priced capital stack that reduces and, in some cases, eliminates the need for additional equity required while driving better returns.

Bisnow: How do Safehold ground leases impact leasehold liquidity when building owners sell their assets?

Doherty: We’ve seen 42 sales and refinancings behind our ground leases, so the proof of concept is there. In these transactions, the cap rates have been very similar to fee simple comparable transactions, both on multifamily and office assets, with a range of no spread on cap rate to about 10 to 15 basis points.

Having a track record on third-party market transactions has been a powerful part of the liquidity story for Safehold’s modern ground lease assets.

Bisnow: How should owners evaluate the option of a modern ground lease structure for their needs?

Doherty: We’re always here to help new clients understand the benefits for their assets as well as the liquidity track record we have seen produced with our existing clients.

In today’s current environment, we are seeing a lot of demand across all property types. The most active market is currently multifamily — acquisitions, development and recapitalization. The ground lease creates a lower blended cost of capital than fee simple stacks for all scenarios.

The added benefit today in the higher-rate environment is in recapitalizations. If an asset was purchased three years ago with 65% leverage, a 100-to-125-basis-point move in cap rates would make the debt now 85%, requiring a cash-in refinance on a fee simple basis of approximately 10% to 25% of the debt balance.

Alternatively, if the same property was recapitalized with a Safehold ground lease and a bank or agency first mortgage, the equity could refinance 100% of the in-place debt and, in some cases, take cash out upon recapitalization.

Overall, we’re still in the early innings of this business with tremendous growth potential for Safehold and our customers.

Connect with Safehold

East Coast

Tim Doherty

Chief Investment Officer

West Coast

Steve Wylder


Ryan Howard

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