As more residential or commercial property owners in need of liquidity usage ground rents to unlock capital, genuine estate investors might reap the rewards.

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  Numerous openly traded property trusts (REITs) have faced obstacles in the past year, with returns mainly routing stock exchange indexes. But REITs that are focused on ground leases - owning the land without owning the structures that rest 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 methods, it's the very same monetary structure that middle ages royalty utilized with its topics. 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 match the needs of various classes of investors.
  
  And with industrial office property, in specific, in a prominent state of post-lockdown turmoil, the ability to produce a de-risked real estate property has been warmly welcomed 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 a number of on the marketplace in the coming years, prompting other more conventional 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 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 advancement, a hotel, gambling establishment and theater task six miles south of Boston.
  
  Unlocking capital when in need of liquidity
  
  Residential or commercial property owners are utilizing ground leases to unlock capital in locations 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 shoot up. In my own land lease specialty practice, we are fielding more inquiries from owners and developers in all real estate sectors.
  
  One needs to only take a look at numbers promoted 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 value of the portfolio at more than $6 billion. He attributed the growth to a new level of elegance in the land lease market, embracing strategies such as predictability of lease payments, a move that results in more effective prices. Over the last 3 months of 2023, Safehold stock was up almost 40%.
  
  Growing popularity of ground leases has actually not gone undetected. Three years earlier, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on investments in the country's leading 50 markets. High interest from institutional financiers triggered Montgomery Street to expand the swimming 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 have actually seen for GLR's (ground lease REIT) follow-on equity offering verifies our method and verifies that ground leases have actually developed to end up being an acceptable and mainstream financing tool."
  
  Clearly, ground lease mutual fund are among the emerging trends in realty. Ares Management and property private equity firm The Regis Group formed Haven Capital in 2020 to catch growing land lease need to, in their words, provide "a more efficient type of financing" that assists unlock possession value.
  
  These current developments, together with general financing trends within the property 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 offers revealed over the next ten years. By one estimate, the marketplace might be near to $2.5 trillion in the United States alone, providing a significant runway for expansion.
  
  How does a land lease work?
  
  Long a staple of household offices looking for a consistent earnings and predictable stream from long-held vacant parcels in preferable areas, the land lease has actually ended up being widely accepted since the automobile presents a win-win scenario 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 choices, a land lease REIT or sponsor acquires the land from the building owner. This arrangement allows the developer to release crucial capital, directing it toward areas with greater return capacity. Simultaneously, the structure owner maintains full control of the asset while divesting the land beneath it, which, though beneficial in the advancement process, provides little go back to the overall job. The lease is customized to fit the project.
  
  The Boston Harbor Development acts as an illustration of the enduring 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 value of this idea. Ground rent payments consist of fixed yearly lease increases.
  
  " Proof of concept continues to spread," Safehold's Doherty stated.
  
  As the advantages to a job's capital stack become easily obvious, ground leases will get larger acceptance and be frequently employed as a key aspect in the property industry. Predictions recommend that ground leases will end up being mainstream within the next five to ten years, providing a spectrum of financial investment chances 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 check 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 real estate business. For over 10 years, he has actually partnered with ultra-high-net-worth individuals and household offices to obtain and manage thousands of multifamily assets throughout the U.S. and Europe, creating constant returns and favorable social effect.
  
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