Key facts
- Ground leases are increasingly used by affordable housing developers to finance projects.
- Two recent deals involved Safehold providing 99-year ground leases for projects in Santa Cruz County and Austin.
- These projects utilize Low-Income Housing Tax Credits and avoid outright land purchases.
- Modern ground leases offer predictable rent increases, unlike older models with steep, unpredictable hikes.
- California and Texas have implemented zoning reforms, but these have not lowered land costs.
- California regulators are capping ground lessor charges above original land costs in LIHTC deals.
Ground leases are becoming a more common financing tool for affordable housing developers struggling with high construction costs and limited capital. These long-term leases, where a developer pays rent for land use rather than purchasing it outright, are being utilized in expensive markets like Santa Cruz County and Austin, Texas.
Two recent transactions highlight this trend: The Pacific Companies secured a 99-year ground lease from Safehold for a 256-unit project in Santa Cruz, while The NRP Group entered a similar lease with Safehold for a 336-unit development in Austin. Both projects are slated for completion in 2028 and rely on 4% Low-Income Housing Tax Credits.
Institutional investors are marketing ground leases as a way to fill capital gaps in Low-Income Housing Tax Credit (LIHTC) projects. Steve Wylder, head of investments at Safehold, noted that persistent gaps due to high construction costs and elevated interest rates require innovative solutions.
While California and Texas have implemented zoning reforms to boost housing supply, these measures have not significantly impacted land affordability. Modern ground leases, such as Safehold's model, aim to provide predictability with fixed annual rent increases and capped Consumer Price Index (CPI) resets, addressing concerns about the steep and unpredictable rent hikes associated with older ground lease structures.
Despite the growing acceptance, some lenders and equity sources still perceive risk in ground leases, requiring developers like NRP to undergo extensive education. California regulators are further ensuring fairness by requiring developers to document original land costs and capping what ground lessors can charge above that basis in LIHTC deals.