With The Future Of Interest Rates Uncertain, Ground Leases Emerge As A Strong Financing Alternative

Interest rates are at the top of real estate investors’ and developers’ minds right now. The Fed bumped its benchmark lending rate by 0.5% on May 4, the biggest incremental jump in 22 years. With the benchmark interest rate anchored near zero since the beginning of the pandemic, this increase is hitting the real estate industry hard. 

This is all especially complicated news for borrowers, as uncertainty when it comes to interest rates leads to hesitancy in lenders.  

“Any time there is base rate uncertainty and volatility, traditional lenders tend to widen spreads or back away from the market entirely,” Haven Capital head of acquisitions Joe Shanley said. “The result is that borrowers begin to look beyond their traditional sources of debt.”  

Haven Capital provides ground leases for stabilized assets, recapitalizations, redevelopments or repositionings, lease-ups and developments. Shanley said that with interest rates shrouded in uncertainty, now is the best time for real estate borrowers to turn to ground leases as a source of flexible long-term capital without interest rate risk. Bisnow spoke with him to learn more about the state of the market and the benefits ground leases have to offer today’s borrowers. 

Bisnow: How would you describe the current state of the market, specifically in regard to interest rates? 

Shanley: Interest rates continue to rise and are experiencing unusual volatility today. Long-term base rates are moving 10 or 20 basis points a week, which is atypical. The result is both equity and debt capital are beginning to thin out. 

When it comes to real estate, when you break things down into different asset classes, things get even thinner. There is still liquidity in multifamily and student housing, but there is a lot less in office, retail or hospitality, which have already been hit hard by the pandemic. 

The bottom line is that spreads are widening in a debt market where lenders are taking a risk-off approach, and as a result, the total cost of debt is increasing. This means investors are forced to make debt assumptions that are materially different from what they were assuming six months ago both in terms of cost of capital and availability. 

What hasn’t changed, however, is the capacity we have to fill the gap that the volatile capital markets have created. As the availability of capital changes, we can be a source of liquidity that is available at a long-term fixed-rate basis, providing our customers the ability to lock in financing at what are still historically low interest rates. 

Bisnow: What are some common misconceptions about ground leases?  

Shanley: When people think of ground leases, they typically think of the type of ground lease that has been around in primary markets like New York City for decades. These leases have often served as tools of familial wealth preservation — and favored the lessor. These structures suffered from difficult elements like fair market resets and were sized incorrectly, resulting in distress at the asset. 

This has nothing to do with what we do at Haven. We are a service business that offers our clients a product that gives them the opportunity to enhance both the financeability and marketability of their assets. Our customers see us as a form of flexible and user-friendly capital that is an attractive means to finance their assets.  

Bisnow: What are the unique benefits of ground leases?  

Shanley: In the current market environment, there are many. Our ground lease capital is available at a meaningful cost discount to traditional financing with substantially more duration. Additionally, there is no refi risk or interest rate risk looking forward. 

The debt capital markets today are experiencing a storm of both increased cost and reduction in availability. That’s not something you have to worry about with a ground lease. Instead, with a ground lease, you get a lower total cost of debt while increasing the amount of total debt proceeds that can be achieved in an asset. 

Bisnow: What, specifically, does Haven have to offer? 

Shanley: When it comes to the ground lease space, we are the only provider that is institutionally backed that offers clients the option to repurchase the fee interest in the future. We see our ground lease as a specialty finance tool — owners can get the financing they need, without having to worry about the future of interest rates, all while not permanently giving up the ownership of their land. That’s something no one else offers. Relative to our competitors, the buy-back right creates a leasehold position with superior financeability and marketability.  

This feature was produced in collaboration between Studio B and Haven Capital. Bisnow news staff was not involved in the production of this content. 

Studio B is Bisnow’s in-house branded content studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.