Safehold Offers Building Owners a Profitable Alternative to Traditional Financing

Safehold invented the modern ground lease in 2017, creating a customer-friendly structure that unlocks previously hidden value for building owners. Commercial Observer spoke to Steve Wylder, Safehold’s Executive Vice President of Investments in Los Angeles, to get an update on how the Safehold ground lease can create value in a high-rate environment, and to see how this breakthrough investment instrument is being utilized on the West Coast and nationwide.

Commercial Observer: How does a modern ground lease help building owners win competitive bids, fund projects, generate better returns and manage risk?

Steve Wylder:  We like to think of our capital and structure as a tool for our customers, and a means to drive a significantly stronger return profile while reducing risk. Whether it’s an asset being purchased, recapitalized or even developed from the ground up, we purchase the fee interest or land component and enter into a 99-year lease with our sponsor, the operator of the asset. Our ground rent is set at a level that’s very accretive to equity returns, with no variable rent or fair market resets, and our form of lease is highly financeable and liquid.

It’s an alternative or supplement to traditional financing on any cash flowing asset. The ground lease helps to drive a lower blended cost of capital, reduce debt and equity requirements, enhance cash-on-cash and round-trip returns, and drive significant tax advantages. We’ve developed a number of key customer relationships around the country, many of whom have closed multiple transactions with us. What we’re seeing through those relationships is that our structure and capital can provide a real competitive edge. At times it can be the difference in an acquisition bid process, or just a smart way to drive a lower cost of capital and better return on recapitalizations or development.

Can you go a bit deeper into what makes Safehold’s structure so attractive relative to traditional financing?

Through the bifurcation – that is, sale of the land component – our customers are able to manufacture a higher unlevered yield. Our capital is highly accretive. From there, stacking a leasehold loan behind our purchase of the fee interest will help to drive a blended cost of capital that’s below traditional financing, and likely with a reduced equity requirement. So you’ve created a higher unlevered cap rate, reduced your blended cost of capital, and reduced your debt and equity. The combination of those factors is what helps to drive much stronger cash flow yields. Our sponsors are able to realize more of their equity return from cash flow and then drive meaningfully higher round-trip returns on exit, where the financeable and saleable nature of our lease (with 99 years of term and no fair market resets) is critically important.

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