As more residential or commercial property owners in need of liquidity use ground rents to open capital, real estate investors might gain the benefits.

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  Numerous openly traded property trusts (REITs) have faced obstacles in the past year, with returns mostly trailing stock exchange 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 industrial land from the buildings that sit on it isn't a brand-new idea. In some ways, it's the very same financial structure that middle ages royalty used with its subjects. But the democratization of ground leases and their growing popularity is reflective of other type of securitization across the economy - developing narrower and more focused return characteristics to fit the requirements of various classes of investors.
  
  And with commercial office realty, in specific, in a popular state of post-lockdown upheaval, the capability to develop a de-risked real estate possession has 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 a number of 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 including 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 traditional REIT, for its Encore Boston Harbor advancement, a hotel, casino and theater job six miles south of Boston.
  
  Unlocking capital when in need 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 questions soar. In my own land lease specialty practice, we are fielding more queries from owners and designers in all property sectors.
  
  One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a news release that the company has expanded land lease offers from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He attributed the growth to a new level of elegance in the land lease market, adopting methods such as predictability of lease payments, a move that causes more efficient rates. Over the last three months of 2023, Safehold stock was up nearly 40%.
  
  Growing appeal of ground leases has not gone undetected. Three years back, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on financial investments in the country's leading 50 markets. High interest from institutional financiers triggered Montgomery Street to broaden 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've seen for GLR's (ground lease REIT) follow-on equity offering validates our technique and confirms that ground leases have actually evolved to become an appropriate and traditional funding tool."
  
  Clearly, ground lease investment funds are among the emerging patterns in real estate. Ares Management and realty private equity company The Regis Group formed Haven Capital in 2020 to record growing land lease need to, in their words, provide "a more effective kind of funding" that assists unlock asset worth.
  
  These current advancements, along with overall financing trends within the property market, develop a pattern that's tough to disregard: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more deals revealed over the next 10 years. By one quote, the marketplace could be near $2.5 trillion in the United States alone, supplying a considerable runway for growth.
  
  How does a land lease work?
  
  Long a staple of family workplaces searching for a stable income and foreseeable stream from long-held uninhabited parcels in desirable places, the land lease has actually ended up being widely embraced due to the fact that the car provides a win-win scenario 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 acquires the land from the structure owner. This arrangement allows the developer to launch essential capital, directing it towards locations with higher return potential. Simultaneously, the building owner retains full control of the asset while divesting the land below it, which, though beneficial in the development procedure, provides little return to the general job. The lease is customized to fit the task.
  
  The Boston Harbor Development works as an illustration of the enduring use of land leases in the hospitality industry. Additionally, this method has actually discovered popularity in retail, health and wellness centers and fast-food outlets. Now, numerous markets are acknowledging the worth of this idea. Ground rent payments consist of established yearly lease boosts.
  
  " Proof of idea continues to spread," Safehold's Doherty stated.
  
  As the advantages to a task's capital stack ended up being readily apparent, ground leases will acquire wider approval and be regularly employed as a crucial element in the property industry. Predictions suggest that ground leases will become mainstream within the next 5 to ten years, providing a spectrum of investment chances for astute gamers.
  
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  This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can inspect 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 realty business. For over ten years, he has partnered with ultra-high-net-worth individuals and household offices to acquire and handle countless multifamily possessions across the U.S. and Europe, generating constant returns and positive social effect.
  
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