Ground-Lease Deals Fueling Investment Trend

Developers overall are realizing more gain by piecemeal sales, often easily achieving full ask, while buyers are being handed a ready pool of properties in the $1-million to $3-million range with a safety net on returns and the ability to acquire a piece of a development that normally would have been out of reach for their investment level. "The prices for ground leases that are backed by quality credit are higher than they've been for some time," David Watson, partner in Dallas-based Direct Development, tells GlobeSt.com.

Direct Development just sold a 54,524-sf ground lease to a private investor from New York City. The hard corner pad fronts a new Lowe's store and Direct Development's next large project at the corner of FM 407 and 2499 in Flower Mound. Watson says the investor got a 30-year ground lease with Chase Bank, which has just broken ground on a branch building on the 1.25-acre pad. From the buyer's perspective, he gets to bank the rent and could inherit the real estate improvements at the end of the lease term.

"Ground leases are very attractive," says Ken Shulman with Dallas-based Staubach Co.'s investment sales team for the central region. "They don't stay in the market very long." The deals are commanding full price and selling within weeks of hitting the market, often on the first day. Shulman and Staubach's Kenneth Mayberry and John Hammill started and finished the Direct Development deal within 60 days.

Watson says competition for top sites among restaurateurs and financial institutions are helping to fuel the emerging trend by increasing values for buyers and sellers alike. "The market is such that a quality restaurant and financial institution are willing to consider a ground lease at a rate higher than they ever have in the past," he says.

A local guru of ground-lease sales, who flies under the radar screen and wants to remain anonymous, says component sales are allowing developers to "recognize more value for their property" and buyers to secure "net and care-free assets." This region's top buyers in the arena are 1031 exchange investors from California. "Individual investors before wanted to own in their backyards," he says. "Those barriers have come down." Plus, he points out developers are savvy enough to have pre-addressed issues like cross access and easements during the planning stage. "The market's more sophisticated now than it was 15 years ago," he says.

The source says a deal easily can close within 30 days "if it's priced right." By that, he's including lease bumps, which normally escalate about 10% every five years, and terms of 20 years or more. A typical deal these days essentially carries a 5.5% cap rate for five years and can hit a 6% cap with the first rent hike. Ground-lease sales, with banks as the tenant, are averaging $3 million and restaurants, $1 million.

As for investors, "they want to own real estate, but they don't want to manage," the source explains. "And, it's all theirs at the end of the lease. If the tenant renews, then you've got your escalation."