Safehold delivers low-cost ground lease capital to commercial building owners

Safehold delivers low-cost ground lease capital to commercial building owners

5 min read
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At a time when real estate capital has become increasingly scarce and expensive, the efficiency of Safehold’s ground lease continues to stand out for building owners. Partner Insights spoke to Tim Doherty, Safehold’s Head of Investments, about the advantages of a modern ground lease relative to traditional financing in any market, the evolution of the industry’s comfort with the product type, and the path to widespread adoption.

Commercial Observer: Safehold recently surpassed $6 billion in modern ground leases and closed over $1.3 billion last year. What are some of the factors that have led to the growing adoption of ground leases as a capital source?

Tim Doherty: The biggest factor is proof of concept – we went from 12 deals in 2017 to over 130 in 2022. We have spent a lot of time out in the market educating the key participants, sponsors, lenders and lawyers, and providing a very consistent, predictable and efficiently priced product. The root of it all is that performance matters and people are seeing how Safehold’s ground lease delivers the most efficient capital in the real estate industry.

Let’s go deeper into the advantages a Safehold ground lease has over traditional real estate capital.

Safehold offers the lowest-cost, longest-term capital in real estate, which allows our clients to generate higher returns. In addition, our modern ground lease structure works alongside all other capital sources. We’ve worked with over 50 leasehold lenders, including agencies, banks, insurance companies, debt funds and REITs. We’ve proven that a Safehold ground lease maintains the liquidity of our clients’ investment and increases returns on their investment by providing a lower cost of capital.

How would you describe the perception of Safehold ground leases now as compared to five years ago?

Simply put, it’s night and day. The ground lease world was beyond fragmented. It was highly localized, utilized by families, universities, hospital systems and municipalities. No two ground leases were alike and people held misconceptions based on a few archaic examples. There was no consistency, the old leases were not tenant or lender friendly, and the economics were difficult to underwrite due to FMV adjustments, percentage rent and uncapped adjustments. When we came along, we turned the structure on its head and said, this needs to be simplified. A ground lease needs to be 1) priced efficiently, 2) have simplified economics, 3) be structured fairly with the client and 4) maintain liquidity for the leasehold owner and the leasehold lender. Consistency and simplicity have helped change the perception – we standardized the product and made it commonplace. And the evidence is there in the quantity and quality of deals; we have executed in over 30 markets within every property type on over 130 transactions.

The past year has seen rising rates and inflation. How are these factors affecting Safehold’s customers and the company’s investment approach?

No one is immune to inflation or higher rates. Everyone has to adjust to fluctuating asset values and changing cost of capital. But everything is relative. Safehold was the lowest cost and most efficient capital in that stack two years ago, when rates were low, and now that rates are higher, we are still the lowest cost and most efficient capital provider. A Safehold ground lease provides long-term efficiency to allow our clients to create higher returns and be better prepared for volatility.

How would you characterize the diversity of Safehold’s customer base?

Our portfolio has client, asset type and geographic diversity. We have closed transactions with clients ranging from international core and core-plus funds to regional and local owner-operators in all assets classes and in the top 30 MSAs in the country. With each transaction, we continue to educate the market and prove with experience and execution that our capital is efficient for everyone and for every capital stack.

Talk about how a Safehold ground lease impacts leasehold liquidity.

Very little. There are two distinct assets, the land and the building. All we are doing is helping monetize those two distinct assets in the most efficient way. Due to our simplified, tenant and lender friendly structure, the liquidity of the building stays the same. With almost six years of track record we have now started to see our clients sell or recapitalize their leasehold positions. The cap rates are on top of the fee simple cap rates.

As an example, a multifamily asset recently traded in Nashville. Our client had done a ground lease with us three years prior upon acquisition of the asset. Fast forward to six months ago, they sold their position at a 4.0%. Looking around the market over the same timeframe, the fee simple assets of similar quality and location were trading between a 4.0% – 4.25% cap rate. Therefore, in this example, the leasehold traded on top of the fee simple cap rates.

How do you envision ground leases reaching the next level of widespread adoption?

Education, implementation and listening to our clients so we can address their concerns. We have a large team in all markets across the country working to grow our portfolio and educate the market on the benefits of Safehold’s modern ground lease. Going from $300 million and 12 deals to $6 billion on over 130 deals didn’t happen overnight. It took five-and-a-half years. We expect that to continue as proof of concept continues to spread. Deals beget other deals, relationships beget other deals. Over 60% of Safehold’s existing customer base have closed, requested, or are currently reviewing another deal with us. We offer the most efficient capital, enhance our clients’ returns and maintain their liquidity. That message has been consistent from day one and with each of our deals we are demonstrating the benefits of our modern ground lease structure.

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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