Ground Lease Financing

Mesirow has completed over 70 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

70+

Completed transactions

$3.5B

In issuance

$966M

2-year average

ground lease graphic

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

     

    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
       

    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.

    • 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 
       
    Sale of Leasehold graphic

    Sale of Leasehold

    Process:

    • Property is acquired from Seller Fee-Simple
    • Leasehold interest is subsequently sold subject to the terms of the Ground Lease 
       
    Sale of Ground graphic

    Sale of Ground

    Process:

    • Property is acquired from Seller Fee-Simple
    • Ground interest is subsequently sold subject to the terms of the Ground Lease 
       

    Senior leaders

    Headshot of Matthew Olsen

    Matthew Olsen

    Director | CTL and Structured Debt Products

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    Headshot of Stephen Jacobson

    Stephen D. Jacobson

    Senior Managing Director | CTL and Structured Debt Products

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    Headshot of Nathaniel Sager

    Nathaniel Sager

    Senior Managing Director, CTL and Structured Debt Products | President & Head of Strategy, Capital Markets

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    Headshot of Andrew Minkus

    Andrew H. Minkus

    Senior Managing Director | Credit Tenant Lease and Structured Debt Products

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