As more residential or commercial property owners in requirement of liquidity usage ground leases to open capital, real estate investors might reap the benefits.

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  Numerous openly traded property trusts (REITs) have faced obstacles in the past year, with returns largely tracking stock exchange indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that sit on it - have actually been an exception.
  
  Splitting the ownership of commercial land from the structures that sit on it isn't an originality. In some ways, it's the exact same financial structure that medieval royalty utilized with its subjects. But the democratization of ground leases and their growing appeal is reflective of other sort of securitization throughout the economy - producing narrower and more concentrated return attributes to fit the needs of various classes of financiers.
  
  And with commercial office realty, in specific, in a prominent state of post-lockdown upheaval, the ability to produce a de-risked property asset has actually been warmly accepted by financiers.
  
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  At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be among numerous on the market in the coming years, prompting other more conventional 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 deal valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback plan with Real estate Income, a traditional REIT, for its Encore Boston Harbor development, a hotel, casino and theater project 6 miles south of Boston.
  
  Unlocking capital when in requirement of liquidity
  
  Residential or commercial property owners are using ground leases to unlock capital in locations where liquidity is lacking. With local banking tightening up loaning - even with the specter of lower interest rates - we are now seeing land lease queries shoot up. In my own land lease specialty practice, we are fielding more queries from owners and developers in all genuine estate sectors.
  
  One needs to only look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, stated in a news release that the company has actually expanded land lease deals from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He associated the growth to a new level of elegance in the land lease market, adopting techniques such as predictability of lease payments, a move that leads to more efficient rates. Over the last three months of 2023, Safehold stock was up nearly 40%.
  
  Growing popularity of ground leases has not gone undetected. Three years back, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on investments in the nation's leading 50 markets. High interest from institutional investors 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 news release, "The strong need we have actually seen for GLR's (ground lease REIT) follow-on equity offering confirms our strategy and validates that ground leases have evolved to become an acceptable and traditional funding tool."
  
  Clearly, ground lease mutual fund are one of the emerging patterns in realty. Ares Management and realty personal equity company The Regis Group formed Haven Capital in 2020 to catch growing land lease demand to, in their words, offer "a more efficient form of funding" that helps unlock asset value.
  
  These recent developments, along with total funding patterns within the realty industry, establish a pattern that's hard to disregard: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more offers revealed over the next ten years. By one estimate, the market might be near to $2.5 trillion in the United States alone, offering a substantial runway for expansion.
  
  How does a land lease work?
  
  Long a staple of family offices trying to find a stable earnings and foreseeable stream from long-held vacant parcels in desirable areas, the land lease has become widely accepted due to the fact that the automobile presents a win-win situation for both the building owner and the landowner.
  
  How does a land lease operate? Typically spanning a term of 50 to 99 years with renewal options, a land lease REIT or sponsor obtains the land from the structure owner. This arrangement enables the developer to launch vital capital, directing it towards areas with greater return potential. Simultaneously, the building owner keeps complete control of the possession while divesting the land beneath it, which, though beneficial in the development procedure, provides little return to the overall project. The lease is tailored to fit the task.
  
  The Boston Harbor Development serves as an illustration of the long-standing use of land leases in the hospitality market. Additionally, this technique has found appeal in retail, fitness and health facilities and fast-food outlets. Now, different industries are recognizing the worth of this principle. Ground lease payments consist of fixed annual lease increases.
  
  " Proof of concept continues to spread," Safehold's Doherty stated.
  
  As the benefits to a project's capital stack become readily obvious, ground leases will gain larger acceptance and be frequently utilized as a crucial aspect in the real estate industry. Predictions suggest that ground leases will become mainstream within the next 5 to ten years, offering a spectrum of investment opportunities for astute gamers.
  
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  This post was written by and provides the views of our contributing adviser, not the Kiplinger editorial personnel. You can inspect adviser 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 property company. For over ten years, he has actually partnered with ultra-high-net-worth people and family workplaces to get and handle thousands of multifamily properties throughout the U.S. and Europe, generating constant and favorable social effect.
  
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