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 310-536-8888 admin@rkmcap.com

Ground Lease Program

RKM Capital through a partnership will execute a “Sale-Leaseback” of the ground under commercial properties, in conjunction with the acquisition/disposition of a property by an owner/operator, who acquires the fee interest. We then lease the land back to the owner/operator on a newly created, 99-year ground lease at an initial lease rate typically 200 bps less than commercial mortgage rates.

While the ground lease economics terms are tailored to each asset, they are extremely active to the owner/operator’s equity returns. The purchase price of the ground is usually 30% of the total acquisition cost at a cap rate 150-200 bps less than the overall acquisition cap rate. For example: a partnership recently purchased and leased back land at a 4.05% cap rate on an asset that traded at a 5.7% cap rate. The ground lease structure improves the cash-on-cash return and increases the return on equity.

The lease contains a repurchase option at a favorable cap rate, typically after 75 years. The ground lease itself is Capital Markets compatible, having been accepted by several arms-length CMBS lenders and their respective counsel.
The acquisition of the fee interest has the following benefits:

  • Cash-on-Cash Return Enhancement
    Providing up to 1/3 of the capital stack at 200 bps less than typical mortgage rates increases the cash flow available to equity.
  • Financing Advance Rate Advantage
    As a result of a higher DSC on a leasehold loan, the advance rate can be higher for leasehold financing than a fee simple financing.
  • Repurchase Option near an 8% cap rate
    Leaseholder can ultimately repurchase the fee interest at an attractive price.
  • Equity IRR Enhancement
    As a result of lower overall financing costs and a higher advance rate, the return on equity is higher for a leasehold transaction than a fee simple transaction.
  • Tax Deductions Advantage
    The ground lessor acquires the non-depreciable land, leaving the leaseholder with a 100% depreciable asset in addition to deductions for ground lease payments.
  • Increased Sale Proceeds
    Bifurcating the leasehold from the fee interest creates greater sale proceeds to the seller.

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