As more residential or commercial property owners in requirement of liquidity usage ground leases to unlock capital, real estate financiers might enjoy the benefits.

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  Numerous openly traded realty trusts (REITs) have faced obstacles in the past year, with returns mostly trailing stock exchange indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that sit on it - have been an exception.
  
  Splitting the ownership of industrial land from the structures that rest on it isn't a new concept. In some ways, it's the same financial structure that medieval royalty used with its subjects. But the democratization of ground leases and their growing popularity is reflective of other kinds of securitization across the economy - creating narrower and more focused return qualities to fit the needs of various classes of financiers.
  
  And with commercial office realty, in specific, in a popular state of post-lockdown upheaval, the capability to develop a de-risked realty property has been warmly accepted by investors.
  
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  At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be among a number of on the market in the coming years, triggering other more traditional REITs to diversify their holdings with land leases.
  
  We have actually currently seen this with a mega-deal including Real estate Income and Wynn Resorts. In a transaction valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback plan with Real estate Income, a conventional REIT, for its Encore Boston Harbor advancement, a hotel, gambling establishment and theater task 6 miles south of Boston.
  
  Unlocking capital when in need of liquidity
  
  Residential or commercial property owners are using ground leases to open capital in areas where liquidity is lacking. With regional banking tightening up lending - even with the specter of lower rates of interest - we are now seeing land lease questions soar. In my own land lease specialized practice, we are fielding more inquiries from owners and designers in all genuine estate sectors.
  
  One requires to just take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, said in a press release that the business has actually expanded land lease offers from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He attributed the growth to a brand-new level of sophistication in the land lease market, adopting strategies such as predictability of lease payments, a relocation that leads to more effective pricing. Over the last 3 months of 2023, Safehold stock was up nearly 40%.
  
  Growing popularity of ground leases has not gone unnoticed. Three years back, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on investments in the country's top 50 markets. High interest from institutional financiers triggered Montgomery Street to broaden the pool to $1.5 billion in 2022.
  
  Murray McCabe, a managing partner of Montgomery Street Partners, said in a press release, "The strong demand we've seen for GLR's (ground lease REIT) follow-on equity offering verifies our method and confirms that ground leases have actually progressed to end up being an appropriate and mainstream funding tool."
  
  Clearly, ground lease financial investment funds are one of the emerging patterns in real estate. Ares Management and realty private equity company The Regis Group formed Haven Capital in 2020 to record growing land lease need to, in their words, provide "a more efficient type of funding" that helps unlock possession value.
  
  These current developments, together with total financing trends within the realty market, establish a pattern that's difficult to ignore: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will only see more deals announced over the next ten years. By one price quote, the marketplace might be near $2.5 trillion in the United States alone, supplying a considerable runway for expansion.
  
  How does a land lease work?
  
  Long a staple of family workplaces searching for a consistent income and foreseeable stream from long-held vacant parcels in preferable areas, the land lease has actually ended up being widely accepted due to the fact that the lorry provides a win-win situation for both the building owner and the landowner.
  
  How does a land lease run? Typically spanning a regard to 50 to 99 years with renewal alternatives, a land lease REIT or sponsor acquires the land from the building owner. This plan enables the developer to launch vital capital, directing it toward locations with greater return potential. Simultaneously, the structure owner keeps complete control of the property while divesting the land beneath it, which, though beneficial in the development process, offers little return to the overall job. The lease is customized to fit the project.
  
  The Boston Harbor Development serves as an illustration of the long-standing usage of land leases in the hospitality industry. Additionally, this technique has found popularity in retail, health and wellness facilities and fast-food outlets. Now, different industries are recognizing the worth of this idea. Ground lease payments include established yearly lease boosts.
  
  " Proof of concept continues to spread out," Safehold's Doherty stated.
  
  As the benefits to a task's capital stack ended up being readily apparent, ground leases will get wider acceptance and be frequently utilized as a crucial element in the real estate industry. Predictions suggest that ground leases will become mainstream within the next 5 to 10 years, providing a spectrum of investment chances for astute gamers.
  
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  This article was written by and provides the views of our contributing advisor, not the staff. You can examine consultant records with the SEC or with FINRA.
  
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  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty business. For over ten years, he has actually partnered with ultra-high-net-worth individuals and household offices to get and manage countless multifamily properties across the U.S. and Europe, creating constant returns and positive social impact.
  
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