US firm Safehold has fundamentally modernised traditional ground leases to offer property owners a predictable and cost-effective way to capitalise their real estate. The company is increasingly applying this structure to subsidised and affordable housing. In an interview with industry journal Commercial Observer, Yosefa Lunzer, General Counsel for Transactions at Safehold, explained how the instrument is being adapted to meet the sector's specific requirements.
Predictability instead of erratic rent adjustments
Historically, conventional ground leases entailed considerable risks. Regular reviews to market value and variable ground rent payments made future obligations unpredictable over decades. This complicated both debt financing and subsequent disposals. Safehold's approach, by contrast, relies on fixed parameters: all cash flows can be modelled precisely over the entire term, turning the land from a potential liability into a reliable source of liquidity.
Because reservations about traditional ground lease models persist in the market, the firm places strong emphasis on education. Lunzer noted that almost every institutional player has either had negative experiences with legacy structures or heard about them. Transparently explaining the mechanics prior to formal contract negotiations is therefore essential to dispel concerns at an early stage.
Relief for complex capital stacks
In the affordable housing space, developers face complex capital structures comprising tax credits, conventional debt and public subsidies. Rising construction costs and high interest rates have recently created substantial funding gaps. A ground lease from Safehold is designed to act as a flexible bridge here, particularly within programmes such as the 4 per cent affordable housing tax credit.
- —99-year terms with fixed annual growth rates and no unpredictable market value adjustments
- —Full coverage of land acquisition costs alongside the provision of complementary funding for developments
- —Recognition of ground rent payments as operational expenditure, noticeably reducing the overall weighted average cost of capital
Lunzer explained that her focus is on aligning documentation with the criteria of all project participants, from tax credit investors and bond issuers to municipal housing agencies. The framework is guided by two core principles: first, all parties must be able to project rent reliably; second, the ground lease must not constrain day-to-day operations or ownership rights.
A cooperative approach when dealing with authorities and lenders is vital, given that all parties share the objective of creating more affordable homes. To date, Safehold has completed 28 affordable housing transactions using this model.
