Ground Lease Financing

Mesirow has completed over 75 ground lease financing transactions totaling $3.5B in value, helping real estate owners and developers to secure financing and achieve their financial objectives.

For real estate owners and developers

75+

Completed transactions

$3.5B

In issuance

$1.1B

2-year average

Ground Leases

Ground Leases and GLFs have been a successful source of financing for real estate owners and developers for decades. They have become increasingly common given the current limitations of traditional real estate debt markets.

In a Ground Lease structure, the land underlying commercial real estate property is net leased on a long-term basis (typically 50-99 years) by the fee owner of the land (“Leased Fee Interest”) to the owners/operators of the real estate building (“Leasehold Interest").

Ground Lease Financing

What are GLFs?

Structured form of commercial real estate financing
Mortgage loan to the Ground Lessor secured by ground leased long-term to a separate building-owning entity who is the Ground Lessee.
- Leased Fee Interest: owns the ground beneath the improvements
- Leasehold Interest: owns the improvements atop the ground

Synthetic ground leases

Legal separation of a traditional fee simple property’s land from its improvements (Bifurcation)
Each of the two bifurcated interests are often owned by affiliated entities
Often performed in conjunction with the closing of a sponsor’s acquisition

Mesirow advises real estate clients on the following pieces which often close together in conjunction with a sponsor’s acquisition

Bifurcation
Mesirow’s direct loan to the Ground Lessor
Sourcing any additional third-party leasehold debt

Advantages

Leverage

CRE sponsors will bifurcate a fee simple property, including at acquisition, as a means to optimize overall leverage.
Traditional real estate transactions seek 65%-75% leverage, bifurcated transactions can produce total leverage of 80-100% between the two legal interests

Cost of Capital

Ground Leases and Ground Lease Financings provide owners of commercial real estate properties a means of fixing a portion of the overall capital stack with fixed-rate capital in both long and short-term options.
The overall cost of capital to sponsors is typically lower with a bifurcated Ground Lease transaction (the target is 200 bps of compression versus a Fee-Simple transaction)

Diversified capital sources

The resultant tenor and risk profile of the Leased Fee Interest and its secured debt, provides for access to an institutional segment of fixed income investors within the debt capital markets.
As compared to traditional Fee-Simple CMBS, these markets are generally more liquid and stable during times of market instability.
Multiple paths to liquidity through the separate marketability of each legal interest

Market Status

Large & Growing Market

The trailing 12 month market size is estimated to be approximately $3B in size (inclusive of REIT equity and financing transactions).

Mesirow represents approx. 60%-70% of the Ground Lease Financing portion of the market.

Typical GLF Terms

Property: Fee interest in ground leased to cash flowing commercial real estate across all asset classes
Size: $10 million plus
Min DSCR: 1.01x ground rent. Ground rent in synthetic bifurcation sized to ~20-30% of fee-simple NOI
Leverage: Sizing largely driven by cash flow. Typically 40-55% of fee simple cost (prior to giving effect to any financing proceeds attributed to the leasehold interest
Term: 5-50 year structures
Hold strategies: Debt is assignable at reasonable costs. Accommodative structures for business plans and hold strategies ranging from 5 to 50 years
Asset types: All asset types, provided sufficient in-place NOI or substantial mitigating factors
Pricing range: Dependent on various underwriting considerations