While the financing landscape for stabilized property is somewhat commoditized, construction financing can be an adventure. In the past decade or so, regulatory and other concerns have driven down the leverage senior lenders can provide for development projects, which in turn has sent many a developer scrambling to fill the gap in their capital stack. This reality has only worsened in the current interest rate environment. As a result, a growing number of projects are being built with supplementary financing, including mezzanine loans, preferred equity and even C-PACE. But perhaps the most interesting development has been the recent popularity of a modern form of ground leases which, although not entirely new, have become increasingly flexible value-creators in the market.

Historically, ground leases were largely landlord-driven. A property owner in a land-constrained market like New York City might have a valuable parcel of land that was ripe for construction. If the ownership group wasn't skilled at development and wanted to retain the property for the long term (e.g. as a generational family asset), it would often find a developer to take out a long-term ground lease. The tenant would acquire development rights — and, effectively, ownership rights — to the property for a century. The landlord, in turn, would retain ownership of the underlying land while getting an annuity-like consistent revenue stream.

The modern form of ground lease is a different animal. Driven by developers in search of capital, the transactions are initiated by existing property owners (or even buyers, in some cases) looking to develop or redevelop a property.