Ground Lease Creation

A number of institutional funds have sought to increase their exposure to the ground lease sector.

Ground leases tend to be held as long term investments and not traded. This combined, with a comparative restricted supply has resulted in a number of funds considering ground lease creation.

Pramerica Real Estate Investors were the first Fund to launch a specialised commercial ground lease fund and have continued to adapt and innovate the use of this asset to satisfy their investment requirements by addressing a market characterised by selective property funding.

Pramerica were the first to utilise ground leases as a financial restructuring tool, with the £90m ground lease creation of six Principal Hayley hotels.

The creation of ground leases from existing freehold assets is achieved by dividing the existing freehold (FH) interest into FH and long leasehold (LLH) interests. Pramerica acquire the FH for a capital premium, in return for an income stream. The LLHolder can utilise the development capital for a number of uses including financial restructuring of existing obligations, as capital expenditure funds to enhance/improve the existing asset.

The creation model has evolved further and can be used as a forward funding/forward commitment tool. The Ground Rent Premium is used to fund a significant proportion of the development capital expenditure.

A creation of an interest of this nature does not restrict the long leaseholder's options to raise money against the asset. There is no reason why the long leaseholder could not sell the ground rent first, release the premium value and then undertake a sale and leaseback over the remainder of their interest. In this manner, the sale of the ground rent, plus a sale and leaseback of the residual interest can actually maximise sales receipts as the sum of both capital receipts can be greater than that of a sale and leaseback on its own.