From Fixed To Flexible: How One Company Is Ushering In A New Era For Ground Leases

When developers set out to secure construction financing, their first move will likely be to call commercial banks or mortgage banking companies. Few would think to turn toward a ground lease — a structure where a property owner sells the land underneath an existing building or a planned development project to a ground lease purchaser who leases it back to them, traditionally for 99 years. 

While this scenario may work for some, the long, restrictive nature of a ground lease has left a bad taste in many developers’ mouths. According to one finance firm, however, it may be time for developers to rethink what “ground lease” means. 

“A lot of people have a preconceived notion about ground leases, and they don’t realize that so much has changed,” said Will Purdy, director of real estate at Twain Financial Partners. 

Purdy said that with a traditional ground lease there is typically a very limited or no repurchase option. This means the sponsor, developer or property owner is effectively giving up ownership of the land although they will maintain ownership of the improvements made to their properties. 

But Twain does not offer a typical ground lease, Purdy said. Instead, the company’s ground lease product operates as a bridge loan, with repurchase options kicking in as soon as year three or four, at a fixed, predetermined price. Twain’s purchase price for the land is typically 35% of the as-stabilized value and the product also allows for the capitalization of up to 36 months of rent payments. This gives developers time to stabilize and generate cash flow. 

“Compared to traditional ground leases, our offering is a totally different model,” Purdy said. “This is a new, flexible type of construction financing with all the short-term benefits of ground lease financing without the long-term commitment.”

Traditionally, developers who have been interested in ground leases were drawn to their ability to help them increase total leverage on their projects, resulting in smaller equity requirements and increased returns. These leases are also very efficient forms of capital that act as interest-only debt. Twain's ground leases still offer all of these benefits, Purdy said, but with even greater flexibility thanks to the short-term repurchase options. 

Twain offers financing for all asset types, from multifamily, retail, office and hospitality to senior housing, industrial and self-storage. Recent ground lease closings include $90M in financing for an apartment project in Cleveland, $50M in financing for a hotel project in Alexandria, Virginia, and $135M in financing for a renewable diesel facility in Reno, Nevada, Twain’s largest ground lease investment to date.

Purdy said that while most people associate ground leases with major coastal cities like New York, Boston and Los Angeles where land prices are very high, Twain is active in all 50 states in primary, secondary and tertiary markets. The minimum investment required is $5M and there is no maximum.

Twain primarily finances construction projects, but Purdy said his team has also financed acquisitions and recapitalizations, including several distressed assets.

Purdy said one of the main things he wants developers to realize about what sets a Twain ground lease apart is the flexibility it can provide. No one has to give up their land forever or worry about potentially getting stuck with a massive rent payment in year 68 of their 99-year lease. Instead, they know they will have the opportunity to repurchase the land in just a few years. 

He said the majority of developers he speaks with are unaware this type of product even exists, or that they can use ground leases to finance their projects. Twain is hoping to change that. 

“We want people to know that we’re here, and we don’t come with the type of headaches ground leases often bring,” Purdy said. “We’re flexible, we’re unique and we’re willing to take on construction risk.” 

This article was produced in collaboration between Studio B and Twain Financial Partners. Bisnow news staff was not involved in the production of this content.

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