Safehold Unlocking Value with New Generation of Ground Leases
Over the past few decades, real estate finance and investment markets have become much more efficient – except in one big area. In an investment world that demands efficient use of capital, why are building owners that are targeting a return of 15 percent or more using their capital to own the underlying land, which returns something closer to three percent? The answer is they shouldn’t be, especially when that land comprises more than a third of their overall investment.
Enter the ground lease.
Historically, ground leases were structured in favor of the landowner, often including one-sided provisions and ambiguous terms that created significant future uncertainty. Older ground leases often impaired the owner’s ability to leverage a building and adversely impacted the overall value when the time came to sell. These impediments made ground leases a challenging source of capital and, as a result, they fell out of favor with sophisticated real estate investors.
The problem was clear: nobody had focused on creating a standardized, leasehold-friendly, value-enhancing ground lease structure adapted to work seamlessly with the modern finance and investment markets.
That changed in 2017 whepioneered what is now known as the modern ground lease industry.
A new generation of ground leases
Safehold set out to eliminate value-destroying provisions from the ground lease, most notably fair market value resets, an innovation decades overdue. Old ground leases had provisions that allowed the landowner to revalue and raise the rent, usually to the detriment of the leaseholder. Safehold’s structure also removes unnecessary and restrictive covenants that impair the leaseholder’s ability to execute their business plan, such as requiring permission from the landlord when they want to upgrade or sell their building.
Modern ground leases help building owners reduce equity requirements and achieve higher returns with less maturity risk and significant tax advantages, untethered by the land beneath their asset.
“We started by making sure this process worked with the leasehold lending market, sizing our ground leases appropriately, pricing them as low as possible, structuring them in the clearest and simplest way,” explains Jay Sugarman, Safehold’s Chairman and CEO. “When you do those three things, both the leasehold financing market and the future buyer market suddenly take notice and start seeing that this is actually very attractive capital. You can own the building without having to dilute your returns by effectively owning a much lower return, passive land position.”
Safehold’s reinvented ground lease structure has become a tool that commercial real estate owners, operators and developers are increasingly leveraging at every phase of an asset’s life cycle: when assets are bought, sold, refinanced or at initial development.