iStar has announced that it intends to explore market interest for possible sales of its net lease assets.
iStar's net lease portfolio, which includes assets that it owns directly and through joint ventures, comprises 19 million square feet of office, entertainment and industrial properties located throughout the country. iStar is also the founder and largest shareholder of Safehold, which has planted a stake in the ground lease industry.
The company has tapped Eastdil Secured as an advisor for this process.
iStar says there is no assurance whether it will sell some, all or none of its net lease assets. Additionally, there are no assurances about the timing and terms of any sales. iStar, which has completed more than $40 billion of transactions over the past two decades, declined to comment to GlobeSt for this story.
The timing of iStar's announcement shouldn't be a surprise. Camille Renshaw, CEO and co-founder of B+E Net Lease, says demand for net lease assets this year has been the strongest she has been in the asset class' history.
"There is a lack of quality deals on the market, given the tremendous amount of capital chasing net lease properties, so pricing for net lease assets is setting records," she tells GlobeSt.com. "Cap rates are at record lows. Ground leases are particularly desirable for investors because they can buy a less expensive, low-risk portion of the capital stack."
If iStar decides to sell, potential buyers include 1031 exchangers, who like to purchase individual assets with ground leases due to their low risk and low cost relative to asset type, according to Renshaw. But some 1031 exchangers avoid ground lease purchases because they do not deliver the same tax advantages as depreciable, fee simple investments, she says.
"However, iStar likely does not want to do dozens of $30 million transactions, even if this is the buyer pool that will pay the most, due to the soft costs involved in running multiple transactions like these," Renshaw says. "So this is likely not the buyer."
The ground lease structure is ideal from a risk perspective for institutional investors, who often do not benefit from real estate depreciation, according to Renshaw. "However, many traditional net lease REITs cannot purchase ground leased assets, so they will be excluded from the running," she says. "The buyer may be a new fund, set up by a larger fund strictly to purchase and hold this large portfolio of ground leases. I would guess that the buyer pool will be small but very competitive."
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