Two or three years from now, when residents move into new affordable housing communities in Northern California, they may remain blissfully unaware of the ancient yet innovative financing structure that made their homes possible: the ground lease. Through its modern application, Safehold Inc. (NYSE: SAFE) is breathing new life into this centuries-old concept, providing a mutually beneficial solution that is reshaping how property ownership and development are approached, particularly in the realm of affordable housing.
Safehold’s approach hinges on the idea that land, much like a corporate bond, is a valuable asset that can be separated from the real estate developed on it. "Modern ground leases build on the idea that land itself is an asset, and it makes sense to bifurcate the land from the development on top of the land," says Tim Doherty, Chief Investment Officer of Safehold. “Consistency and simplicity create liquidity, and before we came into the space, ground leases were neither.” This innovative perspective has allowed Safehold to expand its portfolio dramatically—from $350 million with 12 assets to $6.5 billion across more than 145 assets in just seven years.
Safehold’s ground leases are particularly impactful in the affordable housing sector. In July, Safehold closed on ground leases that will facilitate the development of 781 affordable housing units in San Jose and Concord, California. The projects are being spearheaded by The Pacific Companies, an Idaho-based developer specializing in affordable housing across the Western U.S. “Affordable housing financing has always been challenging, but it has become even more so in this high-interest-rate environment,” says Bjorn Doskeland, Executive Vice President of Finance at The Pacific Companies. The funding gap created by rising interest rates posed a significant challenge, but Safehold’s ground lease structure provided a much-needed solution.
Instead of securing a larger permanent loan to purchase land, The Pacific Companies benefited from Safehold’s strategy of purchasing the land and leasing it back to the project. This arrangement lowers the overall cost of capital, allowing developers to redirect funds that would have otherwise gone toward land acquisition into other critical areas of the project. “For example, replacing $1 million of a permanent loan that would have been used to purchase land with a ground lease at an initial cost of capital that is 50 basis points lower could result in an additional $150,000 of upfront proceeds to the project,” Doskeland explains. On larger projects, this can translate into millions of dollars used to bridge budget gaps caused by increasing interest rates and construction costs.
Safehold’s ability to provide attractively priced capital is not just a benefit to the developers; it ultimately impacts the tenants. “Our favorite thing about Safehold is that they enable us to produce affordable housing using a private, market-based solution rather than relying on public subsidies,” Doskeland adds. This market-driven approach is a significant advantage in an industry often constrained by limited public funding.
Steve Wylder, Executive Vice President and Head of Investments at Safehold, underscores the broader implications of their ground lease structure. “There’s tremendous demand for affordable housing, but there’s also a substantial challenge to create supply,” he says. “Our structure can help bridge those gaps. Just like on the market rate side, Safehold’s ground lease provides attractively priced capital to lower the overall cost of capital and ultimately move projects forward.”
Safehold’s ground lease structure is versatile, working effectively for new development, acquisition, and refinancing in both affordable and market-rate contexts. The company has particularly focused on larger 4% Low Income Housing Tax Credit (LIHTC) deals in high-cost coastal markets, where the need for affordable housing is acute, reports Michele Lerner of Nareit. Safehold’s role in these projects is to position their capital as a tool for developers and owners, enabling the creation of affordable housing where it is needed most. “We’ve now closed a number of deals with that profile with a range of tax credit investors, lenders, and developers—and we intend to do more,” Wylder says.
One notable example is the 2023 development of 80 Saratoga, a 200-unit affordable housing community in Santa Clara, California. The project, led by The Pacific Companies, saw collaboration with major financial institutions such as Bank of America and Citibank. “80 Saratoga is in a high-cost infill market with tremendous demand for affordable product, and The Pacific Companies is a top-tier developer that’s very innovative,” Wylder explains. The project not only met the high demand for affordable housing in the area but also demonstrated the efficacy of Safehold’s ground lease structure in supporting acquisition and development pipelines.
Safehold’s approach to ground leases is not just about providing capital; it’s about ensuring that capital is accessible, predictable, and beneficial to all parties involved. The company works closely with developers, banks, and lenders to create lease structures that are both financeable and saleable, with a 99-year lease term, fixed rent increases, and no fair market value resets or percentage rent provisions. “A basic tenet of our structure is that it’s a 99-year lease, with fixed rent increases and no fair market value resets or percentage rent provisions,” Wylder says. “That’s what makes it a modern structure—it’s highly financeable and saleable.”
Tim Doherty adds that the simplicity and predictability of Safehold’s ground leases are key to their success. “Simplicity and predictability create liquidity. Sponsors and lenders don’t know what taxes will be in six years or what insurance premiums will be next year, but they know what the lease payments for the land will be, so it’s very underwritable,” Doherty says. This simplicity appeals to more than 60 lenders who have partnered with Safehold, allowing for a broad range of financing options that benefit the entire capital stack.
As Safehold continues to expand its presence in affordable housing, the company is also receiving positive feedback from its partners, affirming the value of their innovative approach. “The key is this works for all property types and for all owners and developers,” Wylder says. “Affordable housing is just one more area for us, but we’re also proud to be making a difference in solving the housing shortage.”
Through its innovative application of the ground lease structure, Safehold is not only addressing the critical need for affordable housing but also setting a new standard for how land and real estate development can be financed. As the company continues to grow and expand its portfolio, it is clear that the ancient concept of a ground lease has found a modern, and highly effective, application in today’s real estate market.
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