BH Properties Enters Leased Fee Market

BH Properties is targeting the leased fee market, a niche real estate investment with potential for upside. According to the firm, land fee real estate is made up of mostly mom-and-pop ownership. The firm has made its foray into the space with the $30 million purchase of a ground lease in Fort Myers, Florida, but the firm has other deals in the works, including a property in the Southwest.

“We see this market as ripe for growth,” Steve Gozini, founder and president of BH Properties, tells GlobeSt.com “Real estate ownership is still relatively unsophisticated with most investors owning both the ground and the building but not the mineral rights. Mineral rights ownership was stripped out of many properties long ago as the value was recognized, typically for oil production. The remaining “property” contains the ground and the building itself. These two elements can be separated, typically resulting in the higher yielding improvements and the lower yielding dirt.”

The firm is actively looking to grow its exposure in this space, and is targeting leased land in conjunction with an asset. “This structure can readily be achieved by creating a long-term ground lease where there is a leased fee interest, the ground, and a leasehold interest, the building. The ground lease is senior to the building and hence is most often lower yielding,” John Crump, senior managing director of finance at BH Properties, tells GlobeSt.com. “Much like a securitized fixed income security, the ground lease is akin to the senior investment grade piece, while the leasehold interest has a higher yield. The firm is committed to expanding its presence in the growing leased fee space.”

However, BH Properties plans to remain nimble in its consideration of leased fee opportunities. “As a privately held, national real estate investment firm, we have great flexibility to look at multiple property types,” explains Gozini. “Our current leased fee portfolio is dominated by hospitality, office and multifamily properties but we will consider other property types in well-located areas.”

BH Properties is currently under contract on a class-A multi-tenant property in the Southwest. Upon closing, the ownership will be bifurcated, giving BH Properties ownership of the leased fee position. “We are pursuing several other deals currently, including the creation of a leased fee interest during construction that allows the leasehold developer to bring in less equity than a traditional capitalization,” says Gozini.

For BH Properties, these deals are long-term plays. Looking ahead, it sees more efficiency and the expansion of the leased fee model in the Western US and secondary markets. “We see increased real estate investor sophistication and understanding of a more modern, more efficient way to capitalize their properties. Historically the majority of leased fee activity has occurred in major East Coast cities, but we’re seeing a growing level of interest in other major and secondary markets across the United States,” says Crump. “This growing acceptance and embrace of this strategy by real estate investors implies elevated growth and solidifies BH Properties desire to aggressively expand our presence in the leased fee space.”