Since Safehold invented the modern ground lease in 2017, helping to unlock previously hidden value for building owners, the commercial real estate industry and the economy in general have seen significant upheaval, making capital both more expensive and harder to secure. Given its unique advantages, companies and owners have seized on the Safehold ground lease to work around capital markets challenges. Commercial Observer’s Partner Insights spoke with Steve Wylder, Safehold’s newly appointed head of investments, to discuss how the Safehold ground lease has served as a tool for companies to get creative in securing financing and closing deals.
Commercial Observer: It’s no secret that the commercial real estate industry has been navigating a difficult environment of late. How would you describe the current dynamic, and what are you hearing from customers?
Steve Wylder: Capital has become expensive and difficult to source across our industry. The rise in rates, lack of stability, and cloudy macro picture has made it difficult for groups to value assets and transact, forcing many to the sidelines and some to play defense within their portfolios. Our ground lease capital can be very useful in this sort of environment. It’s a tool to help optimize capital structures and drive better returns, whether on refinance of an existing asset, a new acquisition, or even ground-up development. We provide our customers with a low-cost, highly accretive injection of capital, and offer the stability of a publicly traded platform that’s able to take a long view on assets and markets. This is a market that requires some creativity, and we’re seeing groups really spend the time to understand how a ground lease can help improve their capital structure and returns.
Is there a case to be made that the Safehold ground lease can serve as a defense against some of the challenges in the industry right now?
Certainly. We’re seeing groups look to our structure as a way to reduce their equity requirements, drive a lower cost of capital, and take some of the rate risk off the table. It’s a long-term, fixed-rate slug of capital and a great way to reduce the risk of refinance on the other side of their hold period.
Safehold has grown its portfolio to well over $6 billion. How would you assess the firm’s progress in general, and, more specifically, the firm’s progress toward its stated goal of reinventing the ground lease?
We feel great about the progress we’ve made — both in establishing a large portfolio of assets across the country and in starting to turn the tide on how groups think about our modern ground lease structure. These aren’t the problematic ground lease structures of days past. Our lease is highly financeable and salable, and we’ve got arguably the most attractively priced capital in the market. We’ve planted a flag in each of the major metros around the country, built great customer relationships, and haven’t wavered on our goal of capturing an increasing percentage of the conventional financing market. But at the same time, it feels like we’re just getting started. Ground leases are still a new concept for a lot of folks, which tells us there’s still work to be done in educating the market on how our ground lease capital can be a useful tool, and how it helps to drive better-levered returns, cut down on equity requirements, and realize significant tax advantages.
What areas of the market are seeing the most transaction activity right now?
While we’re active across all asset classes, we’re seeing the most activity in the multifamily space. We’ve done a mix of acquisitions, recapitalizations and ground-up development, including market-rate multifamily, student housing, and in the affordable housing space.
Are there any recent themes you’ve been picking up from your customers, or general takeaways on the advantages of working with Safehold in the market?
We’re definitely seeing groups use our structure on refinance of existing assets — it helps to drive more proceeds (reduced equity requirements) and significantly lower their blended cost of capital. Our capital is attractively priced relative to unlevered yields and the cost of conventional, fee simple financing, where proceeds are constrained and the cost can be dilutive. That can really help to drive our sponsors’ return profile.
Safehold recently announced a ground lease on an affordable housing development in California. How does the Safehold structure fit into the affordable housing world?
We’re relatively new to the LIHTC world, but we know there’s a huge need for affordable housing in California and throughout the U.S. We’re excited to be part of the solution and we’re finding that our structure works very well, much like on conventional multifamily deals. We purchase the fee interest or land component and enter into a 99-year ground lease with the developer. The ground lease helps to drive more proceeds and reduce the developer’s overall cost of capital, which we’re finding is very helpful in getting projects capitalized. We’re helping to plug gaps in capital structures, stretch the efficiency and impact of government resources, and get these projects off the ground.
What impact does Safehold’s structure have on leasehold liquidity and cap rates when assets trade?
That’s an area we track very closely. What we’re seeing inside of our own book is that with our lease, with the 99 years of term, the lack of fair market resets and the financeable nature of the lease itself, the leasehold interests are trading at cap rates that are very close to, or on top of, fee simple trades. That’s really encouraging for us. We just saw one of our sponsors exit the leasehold interest on a large student housing asset here on the West Coast. It’s a ground lease we created with them a few years back when they acquired the asset, and they were able to exit at a great number and implied cap rate. It’s a great outcome for them and another very good data point for us.
What is the long-term opportunity for Safehold and the modern ground lease?
Our plan is to continue to scale the platform across the country, and, again, it feels like we’re just getting started. We’re positioning our structure and our capital as a tool for our customers, and we’re here to help them capitalize their deals in a more efficient way. So, our plan is to stay the course, focusing on increasing awareness, expanding our relationship base, and gaining market share as we continue to grow the business around the country.
