How Haven Capital Is Ushering In The Next Generation Of Ground Leases
While the economy is on the rebound, commercial real estate owners and operators are looking to increase capital and adjust to a new landscape. Owners looking to make improvements to their properties, expand their portfolios or create new streams of revenue are searching for alternative forms of financing.
One financing concept it may be time for these owners to consider is a ground lease. A ground lease separates ownership of land from the property that resides on it and any changes or improvements that may be made to that land. In the past, these leases have been criticized for being inflexible, leading to multiple rent resets and making it difficult for owners to finance or sell their properties.
Today, one company is working to reframe how brokers, owners and operators view ground leases — and how they can best put them to work.
“Ground leases used to just be tools of familial wealth,” said Joe Shanley, head of U.S. acquisitions at Haven Capital, which provides custom-tailored ground leases to property owners in all major real estate asset classes. “Under the old system, life was difficult for the leaseholder, and it made their positions unfinanceable and unmarketable. We’ve taken this from a tool that allows people to maintain wealth and turned it into a tool where the lessee can create wealth.”
Shanley said that Haven has turned ground leases into a specialty finance tool that allows owners to generate the proceeds they need at an efficient price using the ground as leverage, with the option to buy back the land in the future. It is that last point, in particular, that sets this new breed of ground leases apart from the rest.
Lessees in other ground leases platforms permanently relinquish their ownership of the land; with Haven, you have the option to put the pieces back together. When borrowers enter into a lease with Haven, the company offers them 30% to 40% loan-to-value positions, plus an option to purchase back their land fee at year 40, year 70 and, of course, year 99. This allows the borrower to control and benefit from the operational upsides of the property without having to pay for the lowest-cost, lowest-returning portion of the asset, the land, all with a level of flexibility that is tough to find with these complex transactions.
“We’ve created a product that has benefits, utility and flexibility, which was not previously available in the market and very different from what ground leases were previously used for,” Shanley said.
Shanley gave an example of a ground-up multifamily development Haven worked on. He said that many people may not consider using a ground lease to capitalize on the land their multifamily property sits on, but they should because selling the land fee in connection with a multifamily capitalization and then getting a leasehold construction mortgage in the aggregate is cheaper than more traditional financing and also a nonrecourse option.
“This client was a developer who was looking to generate maximum proceeds at low costs,” Shanley said. “They had bids from traditional debt sources that included both mortgage and mezzanine debt, and the mortgage had meaningful principal repayment obligations.”
He said that instead of going the traditional route to capitalize the project, the client turned to Haven, which offered the client a bid for the land fee at 40% of the total cost to develop the property. This helped the client to procure a leasehold construction mortgage that brought it to 80% of the total cost.
“In the end, this deal was far cheaper than the mortgage and mezz stack, and it was entirely nonrecourse,” Shanley said. “On top of that, the client was getting more proceeds than they would in a traditional stack, which allowed them to both dramatically increase their returns and yields while contributing less equity.”
He told another story about the owner of a fully leased office asset who was also looking to maximize proceeds. The borrower was a candidate for CMBS financing but couldn’t get the proceeds it needed. The client came to Haven, which purchased the land fee from the borrower, which improved cover and debt yield enough for the CMBS loan to pencil out. Additionally, the CMBS loan was rated and priced better than it would have been previously, and between the loan and Haven’s purchase of the land fee, the client was able to generate greater proceeds.
Looking ahead, Shanley said he hopes that the industry sees that Haven has transformed the ground lease into a tool that benefits both owners and lenders while reducing the cost of capital and offering long-term, fixed funding at low rates.
“This really is the creative capital solution,” Shanley said. “We’ve brought ground leases into a new era of financing.”
This feature was produced in collaboration between Studio B and Haven Capital. Bisnow news staff was not involved in the production of this content.
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