As more residential or commercial property owners in need of liquidity use ground leases to open capital, investor could enjoy the benefits.

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  Numerous publicly traded realty trusts (REITs) have dealt with difficulties in the previous year, with returns largely routing stock exchange indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that rest on it - have been an exception.
  
  Splitting the ownership of commercial land from the buildings that sit on it isn't an originality. In some methods, it's the very same financial structure that middle ages royalty utilized with its subjects. But the democratization of ground leases and their growing popularity is reflective of other kinds of securitization across the economy - developing narrower and more focused return attributes to suit the needs of different classes of investors.
  
  And with commercial workplace property, in specific, in a prominent state of post-lockdown upheaval, the ability to produce a de-risked property property has actually been warmly embraced by financiers.
  
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  At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of several on the market in the coming years, prompting other more traditional REITs to diversify their holdings with land leases.
  
  We have actually already seen this with a mega-deal involving 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 standard REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater project six miles south of Boston.
  
  Unlocking capital when in requirement of liquidity
  
  Residential or commercial property owners are using ground leases to unlock capital in areas where liquidity is lacking. With regional banking tightening up financing - even with the specter of lower rate of interest - we are now seeing land lease inquiries soar. In my own land lease specialized practice, we are fielding more queries from owners and developers in all realty sectors.
  
  One requires to only look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a press release that the company has actually broadened land lease offers 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 brand-new level of sophistication in the land lease market, adopting techniques such as predictability of lease payments, a move that causes more efficient rates. Over the last three months of 2023, Safehold stock was up almost 40%.
  
  Growing appeal of ground leases has not gone undetected. Three years earlier, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on financial investments in the nation's top 50 markets. High interest from institutional investors triggered Montgomery Street to expand the pool to $1.5 billion in 2022.
  
  Murray McCabe, a handling partner of Montgomery Street Partners, said in a news release, "The strong need we've seen for GLR's (ground lease REIT) follow-on equity offering verifies our technique and validates that ground leases have actually evolved to end up being an appropriate and traditional funding tool."
  
  Clearly, ground lease mutual fund are one of the emerging patterns in property. Ares Management and realty personal equity firm The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, supply "a more efficient type of financing" that assists unlock asset value.
  
  These recent developments, in addition to general financing trends within the realty industry, establish a pattern that's hard to ignore: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals announced over the next 10 years. By one quote, the market could be near $2.5 trillion in the United States alone, offering a substantial runway for growth.
  
  How does a land lease work?
  
  Long a staple of household offices trying to find a steady earnings and foreseeable stream from long-held vacant parcels in desirable areas, the land lease has ended up being widely welcomed due to the fact that the vehicle provides a win-win situation for both the building owner and the landowner.
  
  How does a land lease run? Typically covering a term of 50 to 99 years with renewal alternatives, a land lease REIT or sponsor acquires the land from the building owner. This arrangement allows the designer to launch vital capital, directing it toward locations with higher return potential. Simultaneously, the structure owner retains complete control of the asset while divesting the land below it, which, though useful in the development procedure, supplies little go back to the total project. The lease is customized to fit the task.
  
  The Boston Harbor Development acts as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this approach has discovered popularity in retail, health and wellness facilities and fast-food outlets. Now, various industries are acknowledging the worth of this concept. Ground lease payments include established yearly lease increases.
  
  " Proof of principle continues to spread out," Safehold's Doherty stated.
  
  As the advantages to a task's capital stack ended up being easily evident, ground leases will get wider approval and be frequently employed as a crucial element in the realty market. Predictions suggest that ground leases will become mainstream within the next 5 to 10 years, using a spectrum of financial investment opportunities for astute gamers.
  
  Related Content
  
  Bright Spots Amid Commercial Realty Struggles.
  REITs Unveiled: A Comprehensive Guide for Investors.
  How to Find the Best REIT Stocks.
  Publicly Traded REITs vs. Non-Traded REITs: What's the Difference?
  Real Estate Investing: How You Can Profit Now.

This article was written by and presents the views of our contributing consultant, not the Kiplinger editorial personnel. You can check 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 genuine estate business. For over ten years, he has actually partnered with ultra-high-net-worth individuals and household offices to get and manage thousands of multifamily assets throughout the U.S. and Europe, generating constant returns and favorable social impact.

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