Borrowers searching for capital in a challenging financing market are using ground leases as a more cost-effective alternative to traditional lending sources. Haven Capital is one firm that has carved out a bigger niche as a capital provider that uses ground leases to help property owners build their capital stacks. When The Real Deal last sat down with Haven Capital a year ago, ground leases were emerging as a new “go-to” source of capital for real estate owners, developers, and investors around the country. That appetite for financing has grown exponentially larger given higher rates and less liquidity from traditional lenders.
Haven Capital is stepping up to fill those gaps with an additional $1 billion in funding capacity and the ability to offer early repurchase options. We recently talked with Haven Capital’s Head of Acquisitions, Joe Shanley, to hear his views on where capital markets are headed and how ground leases are providing needed solutions to financing gaps.
TRD: Thanks to your recent capital raise, you have plenty of dry powder to do more deals out in the market. What are you seeing for demand?
Shanley: People are looking to ground leases as a means to capitalize an asset that either cannot find a home in the traditional debt market or cannot find the necessary proceeds in the traditional debt market. We are a much more efficient source of real estate debt capital than any other provider right now. We’re seeing a fair amount of demand in multifamily, multifamily development, retail, and industrial for both acquisitions and recaps.
Given that we’re able to offer options to repurchase the fee interest as early as year 10, our clients view us almost entirely as senior debt now – unlike less flexible ground lease providers where they permanently own the asset. The repurchase options also mean that our ground lease capital is tax efficient and can be used in a wider variety of transactions like opportunity zones where a less flexible ground lease provider would be problematic.
TRD: We’re hearing a lot of buzz around ground leases in the current market as an alternative capital solution. Can you give us a high-level view of how these deals work?
Shanley: Very simply, our customers come to us and sell us the fee interest in their property for 30% to 40% of the fee simple value of the asset. They are then applying leverage to the leasehold behind us. The combination of our proceeds and a leasehold lender’s proceeds is greater in terms of total dollars than what would be achieved in a traditional debt stack. A bifurcated stack is also a cheaper blended cost of capital.
As an example, if a sponsor bought an asset three years ago and put 60% debt on it, that asset is worth less today. Likely, the 60% LTV loan is now a 80% LTV loan. The sponsor must generate a means to recapitalize that 80% out, which does not exist in the traditional debt market today. A sponsor can sell us the fee for 40% of the value of the asset. We can then help the sponsor secure a lender for another 40% of the asset – achieving 80% leverage that is not available from traditional lenders today without using high-cost preferred equity.
TRD: On the borrower side, what are some of the common reservations that you hear from sponsors who are interested in ground lease deals?
Shanley: The question we often get is how does this affect the value of my leasehold? The repurchase options should address that concern directly. We are essentially cheap assumable debt that a next buyer can elect to pay off or leave in place. The reason that we offer repurchase options based on a mathematical formula as opposed to fair market value is that it allows the person that you’re going to sell your leasehold to in the future to understand the price at which they can put the pieces back together again. We’re also creating leaseholds that gain value over time as they get closer to the repurchase option, which is unique to the product that we’re offering.
TRD: What’s your target market and typical dollar range for ground lease deals?
Shanley: We’re focused on the top 25 markets in the country. For the most part, we’re looking at multifamily and multifamily development. We also will look at retail, hospitality, some last-mile logistics. The smallest check that we will cut is $15 million, and we would have the capacity to go up to $500+ million
TRD: What types of locations work for a ground lease? Does it need to be a really high-demand site, such as assets in dense urban areas?
Shanley: Ground leases tend to work best in urban, or largely urban environments where the value of the land is a meaningful portion of the value of the asset and the value of land is not easily impaired by competition.
TRD: Can you share an example of a recent ground lease deal that your firm has executed?
Shanley: We recently did a deal with a multifamily investor in the southeast who had bought a value-add property that required a fair amount of transition. The sponsor had floating rate debt that was coming up to an initial extension. In connection with that extension, they were likely going to have to make a paydown, plus buy an interest rate cap, which would have been a very meaningful amount of money. They came to us and we provided them with a quote on a $42 million ground lease. We also arranged for leasehold debt quotes behind us and provided them with a capital stack that allowed them to avoid making a paydown and avoid buying an interest rate cap. They ended up with a very favorable outcome well in advance of their maturity.
TRD: The ground lease market seems to be a highly specialized niche. How competitive is this sector?
Shanley: There are very few players in the ground lease space. We raise money around making sure that we have the best priced, best-structured ground lease capital. We can win on pricing, which is critical but its our ability to provide the flexibility of repurchase options and creative structure that our clients value the most. We are really the only group that’s ever commercially originated ground lease as debt, which we have been doing for the last three years.
TRD: How active has your firm been over the past year, and what does your pipeline look like over the next 12 months?
Shanley: Our pipeline in underwriting is currently in excess of $1.5 billion, of which 70% are multifamily. We want to deploy $1 billion dollars over the next 12 to 18 months, and there is a material amount of capacity behind that with our recent capital raise.