As more residential or commercial property owners in requirement of liquidity use ground rents to unlock capital, genuine estate investors could reap the benefits.
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  Numerous openly traded property trusts (REITs) have actually faced difficulties in the past year, with returns largely trailing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that rest on it - have actually been an exception.
  
  Splitting the ownership of commercial land from the structures that sit on it isn't an originality. In some ways, it's the same monetary 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 across the economy - creating narrower and more concentrated return attributes to match the needs of various classes of financiers.
  
  And with industrial office property, in particular, in a prominent state of post-lockdown turmoil, the ability to produce a de-risked real estate 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 a number of on the market in the coming years, prompting other more standard REITs to diversify their holdings with land leases.
  
  We have actually 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 arrangement with Real estate Income, a conventional REIT, for its Encore Boston Harbor development, a hotel, casino and theater job 6 miles south of Boston.
  
  Unlocking capital when in need of liquidity
  
  Residential or commercial property owners are using ground leases to unlock capital in locations where liquidity is lacking. With local banking tightening up even with the specter of lower interest rates - 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 take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, said in a press release that the business has actually broadened land lease deals from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He attributed the development to a new level of sophistication in the land lease market, adopting strategies such as predictability of lease payments, a relocation that causes more effective prices. Over the last three months of 2023, Safehold stock was up almost 40%.
  
  Growing popularity of ground leases has not gone undetected. Three years ago, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on financial investments in the country's top 50 markets. High interest from institutional investors prompted 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've seen for GLR's (ground lease REIT) follow-on equity offering verifies our strategy and validates that ground leases have developed to become an appropriate and traditional financing tool."
  
  Clearly, ground lease investment funds are among the emerging trends in realty. Ares Management and property personal equity company The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, provide "a more efficient kind of financing" that helps unlock property worth.
  
  These recent advancements, in addition to total funding trends within the real estate industry, establish a pattern that's difficult to neglect: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will only see more offers announced over the next 10 years. By one quote, the marketplace could be near $2.5 trillion in the United States alone, offering a significant runway for expansion.
  
  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 preferable locations, the land lease has ended up being commonly welcomed due to the fact that the vehicle presents a win-win situation for both the structure owner and the landowner.
  
  How does a land lease operate? Typically covering a regard to 50 to 99 years with renewal alternatives, a land lease REIT or sponsor acquires the land from the building owner. This plan allows the developer to launch crucial capital, directing it toward areas with higher return capacity. Simultaneously, the building owner keeps complete control of the property while divesting the land underneath it, which, though helpful in the development process, offers little go back to the general project. The lease is customized to fit the project.
  
  The Boston Harbor Development acts as an illustration of the enduring usage of land leases in the hospitality market. Additionally, this technique has actually found popularity in retail, fitness facilities and fast-food outlets. Now, different markets are recognizing the worth of this idea. Ground rent payments include established annual lease increases.
  
  " Proof of concept continues to spread out," Safehold's Doherty stated.
  
  As the benefits to a project's capital stack ended up being easily evident, ground leases will gain wider acceptance and be frequently utilized as a crucial element in the property market. Predictions suggest that ground leases will become mainstream within the next five to ten years, using a spectrum of investment chances for astute gamers.
  
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  This article was composed by and presents the views of our contributing adviser, not the Kiplinger editorial personnel. You can inspect 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 partnered with ultra-high-net-worth individuals and household offices to acquire and manage thousands of multifamily assets across the U.S. and Europe, producing consistent returns and favorable social impact.
  
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