Safehold transaction volume gains momentum as market begins to rebound

Safehold transaction volume gains momentum as market begins to rebound

9 min read
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Head of Investments Tim Doherty sits down with The Ground Up to discuss the evolving modern ground lease landscape, recent deal activity and Safehold’s investment process

You’re coming off a Q4 with the most Safehold deals closed of any quarter to date. How have you seen the market evolve in that time frame?

In the last few months we really just picked up the momentum we had built in 2019 pre-COVID, when we saw a tipping point in the understanding of our structure, who we are and how we’ve modernized ground leases. As the business world reemerged from the fog of COVID and sponsors looked to transact again, whether refinancings or sales, they realized the efficiency of our structure. I also think sponsors realized, especially during this time, the certainty of execution and efficient pricing we provide are pretty crucial. Our pricing got even cheaper with the market the past 12 months, and our certainty was known from before the COVID freeze. So I think those were the main reasons there was a rapid increase in activity coming out of the depths of COVID.

How have conversations with customers and prospective customers changed since the onset of COVID-19 and since the market thawed?

Again, I think it’s the understanding. There’s a lot less of “what’s a ground lease” and more conversations about how we’re different and better. It’s more market driven, the efficiency component in the context of a particular deal. All of our work over the past number of years to simplify, clarify and modernize the ground lease structure is paying off. We have a deep knowledge of the ground lease market and continue to grow that knowledge with each deal we close. We’re coming up in conversation without us being in the conversation. We’re not just making calls, we’re taking calls because people see their partner, competitor, lender or client do a deal and therefore want to know what’s working so well.

Why do you think multifamily in particular is resonating in this new climate?

We’ve done a lot of work in multifamily and there’s a ton of opportunity. We took a grassroots and comprehensive approach to it when we started this business. We didn’t just say, hey, here’s a new ground lease, owners and developers of real estate go do it. We also went to the lending communities to educate them, because senior lenders contribute a substantial part of the capital to a deal. Educating lenders alongside the education of the owners, operators and developers helped pave the way, especially in the multifamily space. Once lenders get comfortable, it becomes more of a rinse, wash and repeat exercise. We’re starting to see that benefit play out in the multifamily arena. 

What characteristics of a Safehold ground lease generally resonate most with customers, as compared to traditional, fee simple structures?

Simplicity, clarity and efficient pricing create liquidity. Simplicity is the biggest factor if you want to look at structure. Pricing efficiency – efficient structures should be priced effectively and we do with current pricing on Safehold ground leases ranging from 3.0 to 3.5% for most stabilized assets and can be tighter for true core locations and assets. We are not just modernizing the ground lease structure, we are modernizing real estate capitalization to ensure owners and operators of real estate receive the economic benefit.

During what phases of a building’s lifespan are you seeing Safehold ground leases provide the most value?

I would say it’s at anytime during a property lifespan: construction, stabilizing, conversions and stabilized. We have also completed deals on older buildings that have gone through different life cycles. 195 Broadway is a great example; that is a 100-year-old building and we just put a new 99-year ground lease on it because it’s been revived to have another new life. That’s what you’ll see in a lot of urban markets going forward – that’s the theory of ground leases in general. A property will go through a life cycle and maybe even a change of life over the course of its 99 years, whether that be transformation of the actual physical structure or that structure is taken down and rebuilt.  

The SAFE x STAR program pairs a Safehold ground lease with a leasehold loan. How does this structure benefit customers?

Simplicity and certainty of a one-stop shop. The fact that we have two companies in the real estate space, in different parts of the capital structure, is extraordinarily beneficial to the client. We have the lending platform in iStar, with an incredibly strong track record, and Safehold, the leader in ground leases, so it’s a natural pairing and one that truly benefits the client with efficient capital from both companies.

How has the Safehold ground lease structure evolved based on customer feedback?

The key is that this is an agreement with multiple parties involved. There’s the sponsor and the lender. And while we’ve driven innovation across the ground lease ecosystem, we also have to evolve. We’re making the whole market evolve and we can’t turn a blind eye to the commentary that comes from all sides. It comes from the lending community, and it comes from the equity community in terms of how to make our structure more efficient. If 10 different people ask you the same question 10 different times, you might want to think about your answer. More often than not, it shouldn’t be the same answer if it’s coming again and again and again. So we’ve just continued to evolve, always to benefit the property and the tenant position, while still making our ground leases highly efficient for our shareholders.

When Safehold’s originators first meet with prospective customers, what are some of the questions you find yourself answering most frequently?

What have you done lately is probably the biggest one. You’re only as good as the last couple of deals you’ve done. Look, I think a lot of it is experience and how the market’s reacting to the product. When we started Safehold three and a half years ago, it was hypotheticals. Now, we can give true real world feedback on the efficiency of our structure, the lenders that have participated, the type of properties and their life cycles, the type of clients we’ve worked with, their equity structures and so on.

With over 75 deals under our belt, a lot of different structures and types of situations have occurred, which only continues to build our knowledge and ability to custom-tailor these ground leases structures for the client. So for prospective new partners, we often find ourselves leveraging our experience working on similar deals.

What does the lifespan of a deal conversation generally look like from the first meeting until closure? What are some of the key milestones?

Closing a deal with a ground lease is no different from closing any other type of real estate transaction. This is a client business. If a client needs us to move quickly we will. We have closed in as little as 15 days. Generally, an acquisition will be somewhere on the order of two to three months of initial conversations until closing. Recapitalizations are similar, if not a little shorter. Developments tend to be longer just because of all the moving parts and construction components of the deal.

Clients always ask us that question, how long will it take? And the answer is, well, how fast can you and your lender move? We’re just as fast, if not faster, because we have this process down. We’ve worked with over 30 lenders and over 50 clients.

At this point Safehold has a number of repeat customers. How does the process differ when repeat customers come back to do another Safehold ground lease?

First of all, I think that just shows the efficiency of the capital and of our ability to close on transactions. We’ve seen that once a customer does a deal with us, the likelihood of them doing not just another one, but multiple deals with us, is high. We have four to five clients that have done more than two deals with us and are already looking at additional deals. The documents are done, and as long as the transaction is similar, it’s pretty rinse, wash and repeat for the client. Our clients know how efficiently we work, that we are fair and the certainty is there. We’re not going to revert back to stage one.

When Safehold analyzes a deal, what are some of the key factors our team looks at? What is the investment analysis process at a high level?

Location and viability of future cash flows are the two pillars of structuring deals.

First and foremost we’re a location driven business – we focus on infill locations with high barriers to entry and therefore valuable land. The land makes up a large component of the cost of the property. So the first piece is making sure we’re in the right location and therefore it’s an efficient place to do a ground lease.

Secondly, we carefully analyze the cash flow a property can derive because that’s what dictates how we can size a transaction. We ask ourselves what a property can pay in ground rent and still operate efficiently.

And finally, what is Safehold’s strategy for 2021 and beyond?

We are focused on continuing to scale the portfolio and to help building owners utilize modern ground leases to maximize the value of their investments.

We will continue to grow and evolve the ground lease business, whether that be in new forms or types of transactions or expanding in markets we’ve just started to penetrate. We’re in nearly all of the top 25 markets in the country, and we’ve found that, again, once clients have seen that this structure is efficient to use in urban locations, they want to repeat.

We recently closed our first deals in Denver and Seattle. We’ve done deals in multiple Texas markets and those all result in new opportunities as people see how efficient it was with the lending communities in those regions, as well as the different sponsor groups. Market perception has tilted in our favor and we’ve built a deep understanding of the ground lease landscape. We are looking forward to a great 2021 and beyond.

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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