Montgomery Street Partners Forms $1B Ground Lease REIT

Dallas-based Montgomery Street Partners has partnered with an unnamed Fortune 500 US company to launch a new ground lease REIT. The new investment vehicle will deploy $1 billion to invest in ground leases in the top 50 US markets. Ground Lease REIT is the official banner of the investment entity.

The investment model will accommodate existing ground leases as well as ground-up developments, re-developments and existing cash-flowing properties across all property types. Ground Lease REIT will acquire these leases over the next several years.

The investment vehicle serves as a strategic play to hedge against changing market conditions, according to Murray McCabe, the managing partner of Montgomery Street Partners. “We believe this is an extremely compelling opportunity for investors to gain access to long-duration, inflation-protected real estate assets that are cycle tested. Equally, we believe ground leases to be an efficient and accretive financing alternative for real estate owners and developers,” he said in a statement.

Ground lease investment is evolving. While retail and hospitality assets were once prime candidates for ground lease investment, other asset classes are presenting opportunities, particularly for long-term hold investors. Office, for example, is now amenable to the strategy. For example, Kawa Capital Management has completed more than 20 ground lease transactions totaling nearly $1 billion to date. Late last year, it acquired a $273 million ground-lease transaction with Brandywine. The deal was the firm’s largest of the year.

While opportunities are expanding, Kawa agrees that retail and hospitality still present the best opportunity for ground lease investment. “We are really asset class agnostic, but certainly, the most immediate needs from groups that approach us this year have been in hospitality and retail,” says Dan Amer, director at the firm.

There are tremendous benefits to the transaction structure, Amer said in an earlier interview with GlobeSt.com. For example, developers can put a mortgage against the property to get a higher financing level versus only selling out the land, and there is opportunity for operators that want to maximize their return on equity capital.

Kawa Capital and Montgomery Street Partners are not alone. Haven Capital, an entity formed by Regis Group and funds managed by the Real Estate Equity and Alternative Credit strategies of Ares Management Corp., has also launched a $1 billion fund to invest in ground leases. Announced last year, the fund is also targeting ground lease opportunities in the top 50 markets, focusing on all asset classes with a minimum $20 million transaction size. The firm says that its 99-year ground lease model will help owners increase asset values by separating land and buildings while reducing equity requirements, and thus, the total cost of capital. It also provides owners the option to repurchase the property.