As more residential or commercial property owners in requirement of liquidity usage ground leases to open capital, genuine estate financiers might gain the benefits.

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  Numerous publicly traded realty trusts (REITs) have actually faced obstacles in the past year, with returns mainly routing stock market indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that sit on it - have been an exception.
  
  Splitting the ownership of business land from the structures that rest on it isn't a brand-new concept. In some ways, it's the very same financial structure that medieval royalty utilized with its topics. But the democratization of ground leases and their growing popularity is reflective of other kinds of securitization throughout the economy - creating narrower and more focused return attributes to suit the requirements of various classes of investors.
  
  And with industrial office property, in particular, in a prominent state of post-lockdown turmoil, the ability to produce a de-risked realty property has been warmly embraced by investors.
  
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  At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be one of numerous on the marketplace in the coming years, triggering other more traditional REITs to diversify their holdings with land leases.
  
  We've currently seen this with a mega-deal involving 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 development, a hotel, gambling establishment and theater task six miles south of Boston.
  
  when in requirement of liquidity
  
  Residential or commercial property owners are using ground leases to open capital in locations where liquidity is lacking. With regional banking tightening up financing - even with the specter of lower rates of interest - we are now seeing land lease inquiries shoot up. In my own land lease specialized practice, we are fielding more questions from owners and developers in all real estate sectors.
  
  One requires to only look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a news release that the company has actually expanded land lease deals from 12 in 2017 to 130 in 2022, with the value 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 methods such as predictability of lease payments, a move that causes more efficient pricing. Over the last 3 months of 2023, Safehold stock was up almost 40%.
  
  Growing popularity of ground leases has not gone unnoticed. Three years ago, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on financial investments in the nation's leading 50 markets. High interest from institutional financiers prompted Montgomery Street to expand the pool to $1.5 billion in 2022.
  
  Murray McCabe, a handling partner of Montgomery Street Partners, said in a press release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering validates our technique and confirms that ground leases have actually evolved to end up being an acceptable and mainstream funding tool."
  
  Clearly, ground lease investment funds are among the emerging trends in property. Ares Management and real estate personal equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease need to, in their words, offer "a more effective form of financing" that assists unlock possession worth.
  
  These recent developments, along with total funding trends within the property market, establish a pattern that's difficult to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more deals revealed over the next ten years. By one quote, the marketplace might be close to $2.5 trillion in the United States alone, providing a significant runway for expansion.
  
  How does a land lease work?
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  Long a staple of household offices trying to find a constant earnings and foreseeable stream from long-held vacant parcels in desirable locations, the land lease has actually become widely accepted due to the fact that the automobile provides a win-win circumstance for both the structure owner and the landowner.
  
  How does a land lease run? Typically spanning a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor obtains the land from the building owner. This arrangement makes it possible for the designer to release vital capital, directing it towards locations with higher return capacity. Simultaneously, the structure owner retains full control of the property while divesting the land beneath it, which, though useful in the development procedure, offers little go back to the general job. The lease is tailored to fit the task.
  
  The Boston Harbor Development functions as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this technique has found appeal in retail, fitness and health facilities and fast-food outlets. Now, various markets are recognizing the worth of this idea. Ground lease payments include predetermined yearly lease increases.
  
  " Proof of principle continues to spread out," Safehold's Doherty said.
  
  As the advantages to a job's capital stack ended up being readily evident, ground leases will gain broader approval and be routinely employed as a crucial element in the real estate market. Predictions recommend that ground leases will become mainstream within the next five to ten years, using a spectrum of investment opportunities for astute gamers.
  
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  This article was written by and presents the views of our contributing consultant, not the Kiplinger editorial personnel. You can examine 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 realty company. For over ten years, he has actually partnered with ultra-high-net-worth individuals and household offices to obtain and manage countless multifamily properties throughout the U.S. and Europe, creating consistent returns and favorable social effect.
  
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