In 2017, commercial real estate finance veteran Jay Sugarman launched Safehold, a publicly traded REIT managed by iStar Financial, of which Sugarman is chairman and CEO. The mission of New York City-based Safehold, according to its website, is “to revolutionize real estate ownership by providing a better and more efficient way for owners to unlock the value of the land beneath their buildings.” Safehold’s vehicle for waging this revolution is a rethink of the traditional ground lease.
The concept: An income-producing asset typically consists of an operating real estate building that sits on a piece of land. Creating returns from the operating real estate building is capital intensive, hands-on and risky. Hence, investors in the operating real estate building expect comparatively high returns for taking risk. On the other hand, an owner of land on which the operating real estate sits in a traditional leasehold arrangement is a passive, well-secured investor because the landowner gets the operating real estate asset in default, which would have value in addition to the land value, creating security. By separating the lower passive land return through a well-structured land lease from the operating real estate building, the operating building investor can increase their investment return from the operating building.
Safehold provides the following example on its website. The Safehold lease structure has been approved by the CMBS market and is eligible for CMBS conduit loans.