Tax Aspects of Modern Sale-Leasebacks of Real PropertySeptember 12, 2022 – Publications / Mentions
The modern ground lease appears to have gotten started with Safehold’s initial public offering in 2017. As of August 18, Safehold’s market capitalization was $2.78 billion, according to MarketWatch. The adoption of this “new” ground lease has accelerated as others have entered the space. Real estate investment firm Montgomery Street Partners launched a private real estate investment trust called GLR (short for ground lease REIT), which has $1.5 billion of investment capacity for ground lease transactions.2 And Ares Management Corp. joined London-based global investor Regis Group amid the pandemic in late 2020 to launch Haven Capital, a private ground lease investment vehicle.
In the past, ground leases were bespoke affairs that often had fair market value rent resets. However, “over the last few decades, [ground leases] developed a bad reputation, as many real estate partnerships on high-profile assets in New York, like the Chrysler Building, the Lipstick Building and Lever House, went south, due to inherent, structural issues with the lease that were bound to materialize.”3 Often, older ground leases “were improperly sized to the value of the property and didn’t exhibit a predictable cash flow stream.”4
In place of this traditional ground lease, the modern ground leases are noteworthy in that they are generally sale-leaseback transactions with the following characteristics:
- they are sized to around 30 to 40 percent of the total combined value of the real property (the upfront payment);
- the initial annual rent is sized to a percentage of the upfront payment from the landlord-purchaser to the tenant-buyer (for example, 3.5 percent of the upfront payment);
- rent resets every 10 or 20 years based on the percentage change in the consumer price index;
- there are fixed rent escalations (for example, 2 percent annually); and
- for some transactions, there is an option for the tenant to buy back the property (a repurchase option).5
Abraham Leitner and Jonathan Stein examine fundamental tax issues raised by the evolving economics of modern sale-leasebacks, including the preferred tax treatment of lessors and lessees in this article for Tax Notes.
1Cited in Mack Burke, “The Modern Ground Lease’s Proliferation Amid Covid-19,” Commercial Observer, Mar. 16, 2021.
2Business Wire, “Montgomery Street Partners Raises $500 Million in Private Follow-On Offering for The Ground Lease REIT Inc.,” May 16, 2022.
3Burke, supra note 1
5See, e.g., Montgomery Street Partners PowerPoint, “The GLR Ground Lease: A Compelling Financial Solution” (Apr. 2021).