Leased Fee Capital

Eyzenberg LFC provides leased fee capital via institutional partnerships, with a core fund and private insurance and public company (non-discretionary correspondent accounts).

We are seeking opportunities to create and purchase leased fee positions, subject to long-term ground leases, on development and existing income-producing real estate in primary and strong secondary markets. Most asset types are acceptable, with a minimum investment of $10 million and no maximum.

If requested, Eyzenberg & Company can assist the seller/developer in obtaining the most competitive leasehold financing available in the marketplace.

What is a ground lease?

  • A ground lease is a document that memorializes the relationship between a leased fee owner “the landlord” (who owns the land) and the leasehold owner, “the tenant” (who owns improvements/building sitting on the land)
  • The land is leased by the landlord to the tenant on a long-term basis
  • The tenant owns and operate the vertical improvements and is responsible for all expenses including operating, taxes, insurance and maintenance
  • Upon expiration or default under the terms of the ground lease, the improvements revert back to the landlord

A sale makes sense because land under an existing building is a non-accretive asset providing no means to drive its value.

  • There are no specific benefits to operational efficiency stemming from owning the underlying land
  • Revenue is in no way impacted by land owned under an operating asset
  • Unless the property is a near-term development site, all future land value increases will simply be a byproduct of NOI growth producing a larger total asset value where land is a remainder interest

The general economic benefits of a bifurcation transaction include:

  • In a refinance/recapitalization scenario, the leased fee seller repays existing debt and repatriates equity while continuing to benefit from the future upside of the operating asset by continuing to own the leasehold
  • In an acquisition or development scenario, the leasehold buyer/owner achieves higher “all-in” leverage utilizing a ground lease/leasehold financing combo at a lower blended cost than a senior/mezzanine loan option
  • Unlike a traditional senior/mezzanine stack where all debt usually expires coterminously, a ground lease provides low-cost permanent capital with no immediate balloon risk
  • Tax-advantaged execution allows the leaseholder to depreciate 100% of the leasehold improvements (land is not depreciable) and deduct 100% of the ground lease rent (unlike the amortization portion of a loan)

Typical terms and structure are as follows:

  • Lease structure - unsubordinated ground lease
  • Lease term – generally 99 years, but can be shorter depending on jurisdiction and tax implications
  • Purchase price - approximately 20% - 35%+ of the total property (fee simple) value
  • Pricing - 3.75% - 5% cap rate depending on a number of factors, including location, asset class, age, percentage of total value, coverage, etc…
  • Ground rent - triangulated from a number of variables including a premium to the stabilized cap rate of the underlying asset and a target 3x - 5x NOI coverage ratio (depending on asset class and deal specifics)
  • Rent escalation – flexible options include fixed steps, CPI adjusters (with or without caps and lookback resets), percentage rent or flat/ramp up options
  • Buy-back options - deals can be structured with options priced in
  • Leasehold financing – ground leases are structured to accommodate current balance sheet and securitization requirements enabling leaseholds to be easily financed