North America is giving Ground Leases a new lease of life

Christophe de. Taurines and Cecile Babcock , 25 June 2021

Ground Leases have been in use in North America since before the foundation of the United States of America in 1776 and the independence of Canada in 1931. Similarly to the United Kingdom, landlords initially used ground leases to control land for estate management purposes, while enabling operators to use the land for economic expansion. Traditionally, ground leases were issued mostly in the North-eastern corridor of the US, especially around the New York City and the Boston area.

Nowadays, ground leases have made a comeback. However, they are now a financial tool used to optimise value from the land. This is achieved through the bifurcation of the land ownership from the operations of the assets built on top of that land. For instance, this process is mostly used by real estate operators, developers or private equity investors. The land, typically yielding 3-5% annually and representing 30-40% of the total value of the real estate, is bifurcated from the operations of the real estate through a 99-year lease. Upon bifurcation, achieving a 10-15% return on investment becomes much more achievable, as the lower yielding part of the real estate, the land, is off-loaded to very long-term investors.

Those long-term investors are themselves looking at long-term inflation protection, since the ground leases are indexed to CPI over 99 years, and long-term liability matching. They are also attracted to this type of investment thanks to the high-quality covenants and default-protection mechanisms, through the recovery of the operational asset, in case of ground lease payment default.

Ground lease opportunities are now to be found across the USA and Canada, particularly in larger metropolitan areas, the so-called Gateway cities. Long Harbour was able to assemble a considerable pipeline of over USD 3bn. of potential ground- leases. The team would be delighted to speak to you further about this opportunity.          

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