Ground Lease Investment Fund - Is it a good way to increase leverage and yield?
I work for a ground lease fund that is seeking investment opportunities for properties with a value of $20M+, across all sub-markets, and all property types. 

Anyone have interest or want to learn more? 

I am also curious to know your thoughts on the modern ground lease space or if you have even heard of the modern ground lease space before.
[{"id": "hj1mkh4", "text": "Somewhat common in Arizona for residential. Makes the properties EXTREMELY difficult to sell, as the HOA + ground lease is often more than the total mortgage on similar properties, so you would need to gift the property to someone for it to make sense. \n\nI suppose it\u2019s a good structure for buyers who have some amount of money but no verifiable income and thus no credit. Like the trope \u201cbank says I can\u2019t afford a $1200 mortgage but my rent is $2000.\u201d\n\nIn CRE I imagine it would the same - great for the owner, bad for almost everyone else unless they have some special situation.", "replies": [{"id": "hj24mzl", "text": "That is interesting and different than what we structure. \n\nOur ground leases are non-invasive and enhance the DSCR and Debt Yield.\n\nI wrote a long reply on the other comment to help clarify.", "replies": [{"id": "hj2o7cp", "text": "I don\u2019t know your in depth structure. I think for Arizona residential land leases, the initial deal was very attractive and it sounds like yours are. They were done on properties sold to retirees who passed the property to their heirs. \n\nThat was 50 years ago. \n\nPeriodic lease rate hikes have increased the land lease fee to something atrocious that means they sit unsold for years.", "replies": [{"id": "hj2w88s", "text": "Very interesting. Thank you for the information. Our ground leases increase proportional to the CPI or 2%, whichever is higher.\n\nThere was a mess with ground leases properties many years back in NYC because of the fair market value reset, which impacted ground rents. We do not have that in our ground leases, which is why the new term for it is \u201cmodern ground lease\u201d because the old ones were just atrocious sometimes.", "replies": [], "depth": 4}], "depth": 3}, {"id": "hj36shl", "text": "You don\u2019t enhance the DSCR or DY, the subordinate lender would look through and add the GL payments to debt service to calculate DSCR and net them out of NOI to calculate DY which is going to be low to begin with since any lender getting on a leasehold interest is going to want a pound of flesh from the borrower.", "replies": [{"id": "hj3xgrl", "text": "Not true. Just closed on 350k SF of GL deals and the DSCR &amp; DY increased very nicely. \n\nIf the building is worth $20M and we buy the ground for $8M then the leasehold interest becomes worth $12M and if we took 25% of the NOI for our ground rent, but provided 40% of the building value for the ground, you can see how it becomes more financial stern just conceptually. \n\nThe leasehold lender is only lending on 60-65% of the original value, so your assumptions are out of wack. 75% of NOI / 60% of original value = safer deal, which you can see would increase the debt yield since LTVs are the same as a regular purchase.", "replies": [{"id": "hj4szxk", "text": "Your math doesn\u2019t make sense - if you\u2019re taking 25% of the NOI for 40% of the value your cost of capital is significantly higher than a senior lender would be despite the fact that you\u2019re in the most secure position - you own the dirt.\n\nAlso if you\u2019re getting 60% LTV on 75% of the NOI when before you were getting 60% LTV on 100% of NOI then you\u2019re DSCR and DY ratios have gotten worse. \n\nSo essentially what you\u2019re saying with this math is that I had someone buy the land at a high cost of capital to me, allowed me to increase my debt proceeds by a little bit potentially, but at the risk of worse financial ratios. \n\nAnd no I don\u2019t see how this becomes financially stern conceptually a ground lease creates an obligation subordinate only to taxes, sucks out cash flow through a permanent impairment, can\u2019t be worked out, and as you illustrated isn\u2019t financially accretive to the sponsor.", "replies": [{"id": "hj90bxy", "text": "If you have a $20M building and we give $8M for the ground and the NOI was originally $1.5M and we take 25% of the NOI the ground seller is paying $375,000 / $8M = 4.68% \n\nThe leasehold lender would be lending 70% LTV on a $12M ($20M-$8M) leasehold interest at whatever the current rate is for a regular type of deal. \n\nAlso, not sure if senior debt is the right comparison for a lot of our buyers, but more like pref or mezz. \n\nNo, you are conceptualizing this incorrectly. 60% LTV is not applied to the new NOI number, while assuming that the 60% LTV is being applied to the original aggregate purchase price (land+structure). 60% LTV would be applied to the leasehold value (just structure) and that will only have a decrease of 25% of the NOI while we paid in a lump sum 40% of the building value. The leasehold value that the lender is lending on is worth 60% of the original purchase price.\n\nYou can also think of it like selling 35-40% of your property and unlocking maximal cash flow that would not have been able to be unlocked in a traditional deal. If you run a IRR over 20 Years on holding a property traditionally or bifurcating it, you will see the net cash flow after debt service be more represented than the capital gains in the IRR composition. Also, it will be on a safer deal for yourself with better financing metrics, so long as you have a solid lease in place. \n\nI would rather my upside to come in on cash flow than property appreciation because property values can change due to more reasons than change in cash flow and it\u2019s not likely for cash flow to drop over the years, which makes my cash flow a safer bet than property appreciation and not to mention TVM. Although property value tends to go up over time, unless things like HSTPA comes about, which decrease property value but at least keep cash flow stagnant.", "replies": [{"id": "hjc3jdw", "text": "Yea hard pass. Anyways good luck with it, the only people who win in GLs are the people who own the dirt or the people who make their money on the ABS (which in this case is your firm).", "replies": [{"id": "hjc8a0r", "text": "I respectfully disagree. Thank you, if a leasehold operator knew the creativity they can bring to a ground lease structure that would make the deal highly favorable to them, while increasing cash on cash yield 500+ BPS, I think it can be a no brainer. \n\nTo unlock cash flow and reinvest that cash flow over the years adds up to a lot, rather than having it be tied into property value.", "replies": [{"id": "hjc9w8f", "text": "Yea except they aren\u2019t - you can\u2019t sell them and your hosed if a tenant blows out if you\u2019re doing it on retail / industrial / office, they\u2019re generally not financable and are super tough to sell. No one has ever made money in real estate from cash on cash returns, if you\u2019re getting great CoC and you\u2019re stabilized you\u2019re better off selling the asset and redeploying capital then structuring a ground lease to cash out and permanently impairing the asset. \n\nLook I\u2019m sure you\u2019ll get traction I would imagine it\u2019s going to happen more likely much more down market / with unsophisticated investors. $20mm ground purchases is probably an aggressive target but hey whatever, you do you.\n\nGood luck!", "replies": [{"id": "hjing6j", "text": "Some of them are. You can sell them, just not as you would a regular deal, but when they go into the deal they already determined that the benefits outweigh the cons, and there are many benefits. \n\nIf a tenant leaves a shopping center, you have 20 other tenants. Just need a safe DSCR and to analyze the property properly. Same with the other property types. \n\nGround Lease CoC returns are not regular CoC returns, with these you are making more, over long periods of time, and it\u2019s being reinvested. \n\nIf you can GL the property and cash out and get 90% LTV, then leave 10% in a deal in return for a safer financial profile with higher returns, but just on a ground lease then that seems pretty good especially that you just got 90% cash out and will buy another property anyway and pay less in capital gains and have to 1031 a smaller amount (Ground Amount). \n\nThanks and we probably would get good traction in the market you mentioned, but so far our best traction has come from established REPE firms. Also, $20M is for the entire building, so we would be buying the ground for prob $7M or $8M. \n\nMuch appreciated", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hj1us8o", "text": "Ground lease or ground rent means different things in different areas. Perhaps you should expand a bit on your specific situation.", "replies": [{"id": "hj24czg", "text": "We are a NYC-based real estate firm that originates 99-year ground leases underlying national commercial assets. We focus on office, retail, hospitality, multifamily, and industrial \u2013 and are active across all submarkets in the United States.\n \nThere are two strategies that we focus on to add value to building owners:\n \n\n1.    Enhancing Acquisitions \u2013 Simultaneous with purchasing a property, we acquire the land on a 99-year ground lease. As a result, the buyer has a much stronger cap-rate, cash-on-cash returns increased by 350-700 bps, reduction in total equity required of 30-40%, and meaningful depreciation and tax benefits.\n2.    Strengthening a Refinance \u2013 We ground lease the land simultaneous with the 99-year leasehold being refinanced. The aggregate proceeds between our ground lease purchase price and the building mortgage often exceeds 85% of the Property\u2019s value. Despite lowering ownership\u2019s cost of capital and significantly increasing aggregate refinance proceeds, the sponsor retains continued ownership of the leasehold for 99 years with improved go-forward returns.\n \nI was wondering people\u2019s thoughts on the concept.", "replies": [{"id": "hj36i56", "text": "Opportunity funds / sophisticated investors already do this internally if they\u2019re trying to max out proceeds and get the benefit of getting to like 120% DPI on a deal super fast if you know what you\u2019re doing. High likelihood the deal goes back to the bank but whatever you made money on the GL flip. \n\nA less sophisticated investor is likely going to have a lot of trouble getting subordinate leasehold financing on a deal unless you\u2019re holding their hand through the process / have banks lined up. But back to point 1 you\u2019re probably going to burn bank relationships if you\u2019re flipping the underlying dirt (which is what I imagine you\u2019re doing) so if a deal doesn\u2019t work out you aren\u2019t there for a leasehold workout. \n\nIf you\u2019re doing this on yo-yo value asset like office or retail higher than average likelihood deal goes to bank. If you\u2019re doing it on multi agencies I don\u2019t believe will finance so it\u2019s tough. I don\u2019t think any lender in America is going to loan on a GL hotel right now so that\u2019s iced. \n\nAnyways not sure what market you\u2019re targeting but the subordinate financing for these deals is a challenge to begin with, imagine it\u2019s a lot tougher now unless you\u2019re in bed with like hard money lenders and shitty sponsors.", "replies": [{"id": "hj407bq", "text": "Very interesting thoughts here. Really appreciate it. \n\nI am not sure if I\u2019m following along the reason why the deal is going to go back to the bank though? \n\nRegarding the unsophisticated investors getting financing, I have banks lined up for that, but was hoping that they wouldn\u2019t have that hard of a time as almost every mortgage broker I speak with wants to work with us on these. \n\nLove your thought about us flipping the ground and burning banker relationships. We plan on holding for a lengthy amount of time.", "replies": [{"id": "hj4trpq", "text": "GL deals have a bad tenancy to be wipeouts, your margin can erode over time in a secondary / tertiary market if the CPI is higher than market rent growth which can be the case in a lot of places. Add to that basis creep on signing new leases and it\u2019s a perfect storm for someone to hand back the keys, especially if you helped them rip out 100% LTV as you mention in another post - why would I feed the beast on TI/LC  if I\u2019m already cash good and have a tough to sell product, I\u2019ll just \u201csell it\u201d back to the bank. \n\nAnd not sure how your fund makes money if you\u2019re not taking these things and floating ABS on the front coupons to net the spread and selling the tail, the unlevered return doesn\u2019t seem like it would be that great to floating a GL and hold. Once you float bonds lender gets burned if the deal goes back because nothing is going to lead to a workout unless the leasehold is like a toxic waste dump and the bond holders don\u2019t want anything to do with it - they\u2019ll be more than happy to take collateral.", "replies": [{"id": "hjc75wd", "text": "I hear you. Everything is deal by deal. Some deals will work and some won\u2019t. What people do not realize is that the modern GLs can become highly negotiable to protect leasee\u2019s downside, like if inflation rises faster than rents. \n\nRegarding your assumption on how we make money, I am not sure that I fully understand what you are saying. I am not too privy to the bond talk, although I probably should be. Would love if you can please break that down for me. \n\nOur investors enjoy an almost risk free levered 7-8% yield. We can also sell the fee position in the ground at a high price if we want to, but our investors do not really care to at the moment. Maybe they will in 5-10 years.", "replies": [{"id": "hjc8xhi", "text": "Sure. You own a ground lease - someone is obligated to pay you X per month for 1,188 months. You bundle a bunch of the GL payments and structure them as 7/10/30/whatever duration I/O strips. PIMCO / blackrock / whoever comes in and buys them at a negligible spread to an I/o treasury over similar duration. So now the first X years of your cash flow are securitized, cool, you just got a ton of cash. You still have 99-X years of term left once the bonds have been repaid - so what do you do with it? You sell it to a us taxable investor at some discount - they can then take that tail piece of the GL and donate it to a charity and the US tax code allows them to write off the undiscounted future cash flows as a donation - so if you\u2019re super rich with a big taxable event, you can buy the GL from you for say $0.50 on the dollar and then give it away and get the tax benefit of $1 on the dollar from the IRS. \n\nSo, you give me like $8mm in your example, sell the first 30 years let\u2019s say for like 6mm, then sell the tail 30 years for like 4mm and you\u2019ve now turned your 8mm investment into 10mm of sales proceeds easy peasy. \n\nGoing back to my original point there\u2019s no reason for a sophisticated investor to go to you to do this, it\u2019s not that complicated if you want to structure it and sell it just takes some leg work and connections with investment banks.", "replies": [{"id": "hjiov8d", "text": "Your the man. Great break down. Much appreciated. \n\nWe are working with a fairly sophisticated group at the moment on a deal, they are no Blackstone, but have an AUM at approx $2Bn. \n\nAll the best", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hj34rj0", "text": "Ground leases are horrible. They only work if you structure it as part of an acquisition and can securitize payments and max out LTC, if you don\u2019t make your money in the first 12 months you\u2019re dead because you\u2019re going to have a bad time on the sale. I don\u2019t really see any value of having a ground lease fund in my capital stack, I can just as easily structure one, sell bonds on the first X years then flip the tail to someone who wants the un discounted tax write off. \n\nAlso as an institutional investor unless I\u2019m buying in a market (read gateway) where GL is a known thing I\u2019m not to waste time even looking at a deal with one. Exits suck on GL deals, only people who bid them are bottom feeders. \n\nAnyways good luck, might get some traction with less institutional groups looking to really get geared up but those guys are in for a bad ride (although you\u2019re secure so doesn\u2019t matter to you\u2026)", "replies": [{"id": "hj3z1lu", "text": "What you are saying is interesting and I appreciate the feedback. \n\nGround lease deals are actually amazing for a leaseholder, if they can creatively structure the deal. It\u2019s all about how the deal is negotiated from a numbers perspective and lease perspective. The group that owns the leasehold interest can have a better deal than us, if it\u2019s the right deal and structured properly. \n\nIf a ground lease operator pairs up with us on an acquisition, they can double their cash on cash in extreme cases and mitigate large amounts of risk with creative lease provisions. Sometimes they can even get a buy back option and not to mention they get enhanced depreciation benefits. \n\nFor the GL in conjunction with a Refi, your getting 85-100% LTV in most cases, unlocking equity that you would only be able to do in a sale. If a seller likes the building and wants to hold, but unlock as much equity as possible the GL can be a great fit. \n\nExits are more difficult, but not as much with 90+ years left on the GL &amp; increased yield. Also, the potential hurdle at exit can be mitigated with a nicely structured GL. \n\nThank you. Yes so far most of our deals have been coming from very proceeds driven REPE companies, but the equity short syndicators are also perfect for us.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hj37445", "text": "I\u2019ve worked on these deals (Safehold, Haven). Lenders hate them. Fannie won\u2019t finance them and Freddie reluctantly will. It\u2019s essentially financial engineering to increase leverage.", "replies": [{"id": "hj3ubyi", "text": "Last time I tried to do one of these no lender would touch it and we talked to no shit 60+ groups about it.", "replies": [{"id": "ia9tp80", "text": "Ah, times are changing.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hj3z526", "text": "Thanks for the feedback. \n\nVery interesting. Any insight into the other lenders?", "replies": [{"id": "hj4xcy6", "text": "Most don\u2019t like them. Think about it. You\u2019re in a super secured position where you\u2019ll always get paid with the lender subordinating to you. And you\u2019re making a higher return. How does that make any sense to a lender?\n\nWe are doing a $200mmish acquisition now on a class A multi deal. We had to beg the lender (well known bank) to do the deal. It\u2019s their first of this type which is amazing considering how many billions they lend a year.", "replies": [{"id": "hj8x78f", "text": "I appreciate your view. What I would say to that is there is likely lots of dry powder and lenders can not get enough deals and if a leasehold mortgage deal has a very solid DSCR and Debt Yield, as well as just an overall safe tenant profile, good market etc, for an asset, then who cares if there is another group that owns the ground and making an un-levered 4% or 5% a year. As long as the lender is not in the loan to own business, all they have to do is assess the situation a little differently than a traditional deal and increase stringency on certain metrics, which already get enhanced due to the bifurcation. \n\nThat\u2019s very interesting. If you don\u2019t mind me asking, are you owning the leased fee position on this deal or leasehold interest or are you a debt broker? Hopefully little by little the lenders start getting used to these type of deals. I believe Greystar just started including GLs as an official product in their structured finance group.", "replies": [{"id": "hjbr2r9", "text": "We are brokering the debt on this transaction.\n\nEvery bank is buried with year end closings. Things will be different in Q1.\n\nI shouldn\u2019t have been so negative. We could have gotten banks to do it, but at 50% / 10 DY vs the 65% / 7.5% DY requested loan amount.", "replies": [{"id": "hjc4uwk", "text": "Got it. Maybe we can work with you one day. \n\nWhat your saying makes sense. \n\nWow, so your only able to get 50% LTV on class A multifamily? Is the reason solely the leasehold?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjzauo0", "text": "Do you have a discord? I\u2019d love to reach out to you and hop on a call some time. I\u2019m curious to learn more about ground lease structure and leasehold ownership from a lender perspective. I think we could stand to learn from each other and I\u2019d like insight into your firms business model.", "replies": [{"id": "hk040qz", "text": "Just sent you a PM.", "replies": [], "depth": 2}], "depth": 1}]