Today’s challenging economic conditions, including unpredictable capital markets, higher-for-longer interest rates and elevated construction costs, have made it more difficult to get commercial real estate projects to pencil. But these hurdles have also led many to look at alternative solutions that provide a low cost of capital.
Safehold, the creator and pioneer of the modern ground lease industry, has created a platform to provide building owners with a “low-cost, economically transparent” capital source regardless of asset class, said Yosefa Lunzer, general counsel for transactions at Safehold.
Since its inception in 2017, Safehold’s ground lease platform has provided building owners with reduced upfront equity requirements and minimized risk as well as higher, more consistent returns compared to traditional fee-simple ownership, Lunzer added.
“A lot of older ground leases had either fair market value resets or other variable cost provisions that did not allow a sponsor to model rent with certainty for the full term,” said Lunzer. “The ability to model rental obligations under our ground lease positively affects both the financeability and the transferability of the ground lease.”
Bisnow spoke with Lunzer about how its ground lease differs from older models, how it’s structured and what common obstacles arise when working with new sponsors and lenders.
Bisnow: What are the advantages of Safehold’s ground lease as a capital solution?
Lunzer: Our modern ground lease structure provides long-term, cost-efficient capital that can be used throughout the life cycle of a project, whether it’s an acquisition, recapitalization or new development.
We cover just about every major asset class from multifamily to office and hospitality to life sciences. Safehold’s ground lease is a very powerful tool when a sponsor is trying to increase returns and keep the cost of capital low.
Bisnow: What other structural improvements has Safehold introduced to the ground lease industry?
Lunzer: The most important feature of our ground lease is its economic transparency. Our structure gives all stakeholders the ability to accurately model rent payments for the full term, which is crucial to both the financeability and liquidity of the lease. These are two extremely important features to us and certainly to our clients and partners.
On the legal side, we’ve spent a lot of time reviewing existing ground leases with a focus on what did and did not work in the past. That work, together with feedback from our customers on their needs and our experience closing over 145 transactions with over 55 lenders, including banks and CMBS, life companies and agencies, are important contributors to our modern form.
Bisnow: Safehold’s ground lease is designed to give leaseholders freedom to manage their buildings as they see fit without unnecessary restrictions. What does that look like in practice?
Lunzer: Operational flexibility is very important to our customers and, therefore, to us. We have no desire to interfere with day-to-day operation of the property, and our ground lease provisions follow suit. The thresholds for consent are set at an appropriate level to allow our tenants to do what they do best without unnecessary barriers.
Bisnow: Can you talk a little more about the liquidity and financeability of Safehold’s ground lease?
Lunzer: Our track record on market transactions speaks for itself at this point, with dozens of sales, recapitalizations and financings behind our ground leases across asset classes. There are some great stories across our portfolio, and now, when we’re introducing Safehold to a new sponsor or lender, we’re able to provide plenty of real-world examples with real data.
Bisnow: What questions or obstacles can arise when working with new partners and how do you address them?
Lunzer: When it comes to ground leases, it’s always going to be an education process. On the front end, it usually starts with the business folks providing whatever information sponsors and their lenders need to model their returns. The numbers speak for themselves, so parties typically come around very quickly.
When you kick off a deal with lawyers who have experience with historical ground leases, we’re sometimes met with resistance. But when they review our modern ground lease form, more frequently than not, I’ll receive messages from them saying, “Your ground lease really provides me the flexibility and protections I need.” That message is one I get from all sides — leasehold lenders as well as sponsors and preferred equity providers. This is always great to hear, as we’ve done a lot of work to make sure that our ground lease is the right form.
Bisnow: How does the Safehold structure align with the needs of affordable housing developers?
Lunzer: The premise behind our growing affordable housing investments is not that different from the market rate side. Our structure helps fill capital stack gaps. We deliver, overall, a very low cost of capital, and this is what really helps those projects move forward, especially in today’s market.
In some ways, the benefits of our model are even easier to understand for affordable developers because they’re very focused on meeting specific regulatory requirements and building more housing units without the need to take on additionally restrictive gap-filling capital.
The fact that we’re starting to have an impact in the affordable arena is a real source of pride for Safehold. We would love to continue growing in this space and play a role in providing much-needed affordable housing throughout the country.
