The 99-Year Cash Flow Play “Hiding” Inside Your Commercial Property | Ep. 997

Episode Summary

In this episode, host Kevin Bupp sits down with Danielle Ash, partner and co-chair of the ground lease practice at Adler & Stachenfeld, to demystify the commercial ground lease—an often misunderstood capital structure in commercial real estate. The discussion establishes the core thesis that ground leases and sale-leasebacks are powerful, underutilized tools that allow property owners to unlock trapped equity, secure predictable cash flow, and preserve long-term asset ownership without the dilutive risks of joint ventures or expensive equity.

Ash explains the strategic application of ground leases across three distinct profiles: passive owners seeking stable, risk-averse income; parties looking to bifurcate leasehold and fee interests; and developers utilizing ground leases to optimize their capital stack. Using a real-world case study of an early 1900s Garment District building in New York City, she illustrates how a long-term, 99-year ground lease enabled a family to execute a massive, $200 million building renovation entirely funded and managed by the lessee, while retaining their senior land position. The conversation also details the stringent underwriting requirements of leasehold lenders, including essential protections like notice-and-cure rights, new lease rights, and term length standards. Listeners will learn how to evaluate ground leases and sale-leaseback transactions to restructure debt, fill capital gaps in high-interest rate environments, and execute complex business plans while mitigating active operational risk.

Key Takeaways

• Ground leases provide passive property owners with a stable, bond-like income stream while transferring capital-intensive operational and development risks entirely to the lessee.
• Unlike joint ventures, where a developer’s loan default can wipe out the land owner’s equity, a ground lease protects the fee owner by ensuring their senior position remains secure even if the leasehold lender forecloses.
• Leasehold lenders require specific contractual protections within the ground lease, such as simultaneous notice-and-cure rights, the right to secure a new lease on identical terms post-bankruptcy, and a minimum remaining lease term of 50 years.
• Developers and owner-operators can utilize sale-leaseback structures to unlock capital from land equity, allowing them to reduce high-cost construction debt and minimize expensive third-party equity requirements.
• Working with experienced legal counsel early in the deal-structuring process is crucial because ground leases are highly complex, 99-year contracts that must be carefully drafted to remain marketable for future financing and eventual sale.

Key Topics Covered

• Introduction to Commercial Ground Leases
• Three Primary Strategic Buckets for Ground Leases
• New York City Garment District Case Study ($200 Million Renovation)
• Why Ground Leases Outperform Joint Ventures for Risk Mitigation
• Underwriting Requirements for Leasehold Lenders
• Notice-and-Cure Rights and New Lease Rights for Lenders
• Sale-Leaseback Mechanics and Capital Stack Optimization
• Regional Ground Lease Markets (New York, Hawaii, Texas, California, Florida)
• The Role of Guarantees and Tax Structuring in Ground Leases

Episode Chapters

00:00 Intro Host Kevin Bupp introduces the concept of the commercial ground lease as a highly misunderstood but powerful capital structure.

01:47 Ground Leases 101 Danielle Ash defines the ground lease and details the three main strategic scenarios where this structure becomes the ideal solution for property owners and developers.

05:32 Real-World Case Study Ash shares a case study of a historic Garment District building in New York City, explaining how a 99-year ground lease facilitated a $200 million renovation funded entirely by the tenant.

10:10 Why Not a Joint Venture? The discussion compares ground leases to joint ventures, illustrating how ground leases protect the landowner from losing their asset during a developer default.

18:07 Underwriting Ground Lease Deals Ash explains how ground lease valuations and rent structures are determined using net operating income (NOI), coverage ratios, and treasury-based cap rates.

25:44 What Lenders Need to See The conversation covers the essential provisions that leasehold lenders require, such as notice-and-cure rights, new lease rights, and a remaining lease term of at least 50 years.

31:25 What Is a Sale Leaseback? Ash outlines the mechanics of sale-leaseback transactions and shows how they help developers fill capital stack gaps, lower construction loan sizes, and reduce high-cost equity needs.

37:55 Legal Pitfalls to Avoid The segment highlights the vital importance of having experienced legal counsel to structure marketable leases, handle guarantees, and address complex tax structures.

40:57 Connect with Danielle! Danielle Ash explains how to connect with her on LinkedIn and via the Adler & Stachenfeld website, wrapping up the episode.

Full Transcript

[Transcript begins]

Kevin Bupp: What would you do if you owned an early 1900s garment district building in New York City, but the costs associated with retaining this type of long-term asset would be nearly $200 million? What options are even viable? This is just one example of the pressing issues that investors face over the course of their careers in commercial real estate. The good news is, there is a solution. Welcome back to the Real Estate Investing for Cashflow podcast. I’m Kevin Bupp. Today’s conversation is about one of the more misunderstood tools in commercial real estate, the ground lease. I want to unpack how this can be used as a powerful capital structure as it can help owners unlock value without selling, reduce the need for expensive equity, and protect long-term ownership when a traditional refinance or joint venture may not be the right fit. Our guest is Danielle Ash, partner at Adler & Stachenfeld and co-chair of the firm’s Ground Lease Practice. She’s going to help us understand how these structures work, where the money flows, and what has to be true for lenders, owners, and operators to get comfortable. All that plus the answer to our $200 million question. Let’s jump in. Danielle, welcome to the show. It’s great to have you here with us today.

Danielle Ash: Nice to see you, and I’m happy to be on the show. I’ve been looking forward to this one. I know it’s been a long time coming.

Kevin Bupp: We’ve talked about it on the show here and there over the last decade plus that we’ve been doing it. I still believe in the general sense of commercial real estate investments and just commercial real estate in general, I still think it’s a topic that’s misunderstood by a lot of investors. And so, again, just happy to be diving in here about ground leases and sale leaseback strategies. And, again, I think they’re incredibly effective tools, as you’ll probably speak to about just unlocking capital and just creating a lot of flexibility. And so it’s always good to have more tools in the tool chest and just more options available to us as we’re out there in the world investing. So with that, let’s dive into it. And so, as I’d mentioned earlier, our listener base and audience here, it’s a broad spectrum. And so some might not have ever even heard of a ground lease or sale leaseback strategy, while there might be some fairly understanding of the topic. But let’s start with high level before we get into the nitty gritty and the meat and potatoes of it all. When does a ground lease or a sale leaseback strategy become the right solution in a commercial real estate deal?

Danielle Ash: So there are several different circumstances in which a ground lease is the right answer. I’m going to put it into three different buckets. The first bucket is the person who owns the property really doesn’t understand how to operate and manage real estate in a sophisticated way, and they want to unlock value from the property that they can’t really do themselves. So for example, a historic owner of the site whose family maybe built the site a long time ago, but subsequently all of the family members are not really involved in real estate, or a governmental agency who wants to make sure there’s a productive use for the site, but doesn’t really have the capital source or the expertise to be able to build what they want to build. That’s sort of bucket one. Bucket two, I think would be in a circumstance where there’s some other need from a financing structure to create sort of a bifurcated ownership structure where you could have a monetization of both portions of the ownership, so a leasehold and a fee interest. That’s the nature of any ground lease where the fee owner is going to get the rental stream from the property’s rent coming in through the ground lease itself. And then the tenant is gonna be getting the rental stream from whatever their actual users of the site are paying. So for example, if it’s a shopping center, the underlying fee owner is just getting rent for use of the land, the tenant is getting all of the revenue from the rents being charged to each of the stores within the actual mall or shopping center. In that circumstance, that’s often where the interests of each of those parties are different in the sense that there’s a long-term owner who wants to get a coupon clipping opportunity, right? They wanna get a bond essentially, they don’t want a high risk investment, and they wanna ensure, again, that they don’t have the risk associated with the actual operations of the property. That would be slightly different than the first bucket because maybe they do have the expertise to do it, but the capital that they have doesn’t really want to be putting in that kind of risk in relation to the project. So they’re looking for more of a safe investment. The other, which is sort of together, I guess, in more of a ground lease financing structure, which is a very common structure right now. Groups like Safehold and the Ground Lease REIT, which is affiliated with Montgomery Street Partners, one of my clients, what they do is they enter into sale leaseback transactions as sort of a mechanic to provide capital into the capital stack for a project. That may be in the nature of a recapitalization of an asset or for a development asset. And by using the ground lease structure, they’re able to actually get more capital into the structure and reduce some of the burden that the sponsor has in developing the site or recapping the site. And they can do that with a lower cost of capital than they would if they were to do just a straight fee position with debt. And that’s often very helpful, particularly in markets like right now where interest rates are very high and somewhat volatile, and this provides sort of a longer term, more stable sort of component leverage on the property.

Kevin Bupp: Got it, got it. So there’s a lot of different paths we can go down. Obviously, there’s a number of different buckets of when these strategies might come into play. I always find that it’s a lot easier to understand and to understand the full picture when we use maybe a little bit of a case study and surely we can omit any names or companies that are involved in the transaction, but maybe let’s pick one of those buckets and let’s dissect it a little bit, maybe share with us a recent example of a transaction that you’ve been involved in. What was a little bit of the story behind it? Why this transaction, this type of transaction actually made sense, who owned the land, who owns the improvements, where does the lender fit into all this. So again, I always feel like it’s a little easier to understand using real-world examples. So is there something that comes to mind that you might be willing to share that fits in one of those buckets that will better help us paint that picture?

Danielle Ash: So we represented a client who was entering into a venture with some other real estate owner operators for a historic trophy asset in New York City. So we did a ground lease for them. We were on the tenant side in that particular transaction. In this deal, it was sort of in bucket one in the sense that the building was a historic garment district building that was built in 1912. And the current owners of the building were the sort of descendants of the original architect who built the building. That building is a beautiful building, and in New York there’s a lot of interest in maintaining the sort of envelope of the building and the beauty of the building, and it’s overbuilt. So there’s a lot of value in the size of the asset in the sense that if it had been built later on, it would have had more restrictions in terms of size. And so it’s an overbuilt site with a lot of opportunity for more rental stream for the actual use of the site, and it’s a commercial office building. So the family that owned the site, you know, had been operating the site for many years and they were not doing so well in relation to doing that. The property really needed a heavy renovation. And this was a little bit pre-COVID, but it needed a very significant renovation to be able to get the kind of quality tenants that they would want to increase the value of the building. To give you an idea, a lot of Garment District buildings in the last several years, they’re kind of beautiful on the outside. On the inside, they have these tiny little box spaces where you have a lot of really small tenants with short-term leases, not a ton of market value coming in there, not the kind of quality tenant that you want for a commercial office building in New York City to really make the returns that you want. And this landlord knew that they could get a lot more value out of it if they were to have a more professional approach to the asset, but it was more than just management, right? They needed really a group that’s gonna take on the capital risk and intensive construction risk of actually putting in a lot of work into the building, and the benefit that that potential party would get would be sort of the upsized rents that they’re gonna get from the asset overall. So we negotiated on behalf of the tenant with this landlord who entered into a ground lease with us, a long-term 99-year ground lease, that had stable rent throughout the term of the lease. It had sort of a fixed rent concept that remained throughout the term that escalated a certain percentage every year and then had a CPI or Consumer Price Index fixed update every, I think, 10 or 15 years during the term of the lease, which provides sort of a stable base rent under the ground lease. And the tenant was required to perform, I think, something like a two or $300 million renovation on the project. They renovated all of the lobby areas. They took all of the work and sort of restructuring, removing all of the existing tenants, emptying out the building and making it really a quality opportunity. And then they leased up the space. And so during that term, they did have to provide as tenant guarantees to the landlord that they were actually going to perform the work and finish the work, that they were going to put a certain amount of spend into the value of the asset so that the value overall would increase. And the landlord got to retain the sort of residual value of that asset so that long term down the line, if the lease ever terminates, they get a really nice building back that they can actually lease and get the value of. In addition to the fact that they retain the right to enter into fee mortgages or any fee-related financing, and now the asset that’s being financed on the fee side is worth a lot more because it has this rental stream from the ground rent and it’s now a nice asset that’s going to have this beautiful opportunity for great tenants.

Kevin Bupp: Yeah, that’s a great example. So maybe some of the questions that might arise for folks that are less familiar with this structure is like, well, part of the need initially here was that the owner of that building, they needed monies to improve the structure, right? Hundreds of millions of dollars to make the necessary improvements. Someone might ask, well, why did they just do—I don’t know what the underlying debt structure was, if they had any debt, but why wouldn’t they just do maybe a cash-out refinance, like recap it that way? My understanding of the example you just gave is that the value actually wasn’t there yet, right? Like there was perceived value and there was upside, but the business plan would have to be executed. They would need the capital in order to execute the plan, which would then increase the value. And so it’s almost more of a joint—like it becomes almost more of a partnership, right? Like the negotiation between both parties there, the building owner and then this new lessee, right? Or landlord, what ultimately, they’re structuring this together so that both parties win in this equation. Is that a correct analysis?

Danielle Ash: It is. And actually, I think what’s particularly important about this structure and sort of why it’s so different than doing a joint venture, actually, because sort of the real other options they had, they could sell it, right, sell the value and then recoup a huge amount of money to sustain their family over the period of time, kind of wipe their hands of the property and move on. But they wanted to retain the asset for sentimental value as well as for the long-term capital source that it was going to provide. Another way to do that would be to enter into a joint venture with a developer, contribute the property into the venture, and then they collectively make decisions about the venture and about what’s going to happen to the asset, right? That other party puts in capital, does all these other things. The problem with a joint venture structure for a party like that is that once you’re in the joint venture and you’ve contributed the property to it, if there’s ever going to be financing on the property in that structure, that lender actually has the ability to take the property away, right? Because if the developer joint venture with the landlord in this instance, if that group defaults, and in this case, the landlord would have been relying on this new party to actually do the work and actually perform under those assets, right? You know, if they fail, the lender can just wipe their interest. And then the landlord or the original owner is left with nothing, right? They’ve contributed the property already. They have no way to get it back. In a ground lease structure, the tenant, in this case, the developer or sponsor, right, they’re coming in and they’re going to get leasehold financing. That leasehold financing coming from a construction lender is only going to be secured by the leasehold interest in the property. And so the lender ends up with a right to foreclose into the ground lease. So the ground lease retains in that scenario, so they become the tenant under the ground lease and have to perform, but the ground lessor or the landlord is protected, right? They get to retain that interest. And then that lender has to actually perform under the ground lease in order to retain their collateral. So it’s an extra layer of protection for a party like that, where they’re also going to be in a really big disadvantage in the nature of joint venture negotiations, right? No matter who their counsel is, they’re not sophisticated real estate people. So they don’t really have the expertise to know, you know, when they’re going to be taken advantage of, do the kind of capital markets research to understand what the return should be, you know, what level of risk they should be taking. And so they’re already at a disadvantage in a joint venture, whereas in a ground lease, you know, they’re the primary, they’re the sole and most senior position. So they have the protection of that from those parties.

Kevin Bupp: In this example that you’ve shared, obviously, even though this sounds like a much far better decision given the alternative, where does the risk lie? I mean, surely no scenario is completely de-risked. And so what could go wrong or could have gone wrong in this particular structure?

Danielle Ash: So, I mean, a lot could go wrong. And I think, to some degree, there have been things that have gone wrong in similar types of structures that I’ve seen. One of them, COVID hits, right? And so the capital available to the party who is the tenant and has to perform all the work isn’t really there. Similarly, the office market falls out, right? And so their business plan is not as successful or as fast as what they expected, right? In that scenario, what the point of the lawyer is really is to try to negotiate for as much protection on behalf of their client as possible and have as much on the tenant side flexibility for solving the problem. And that could mean, right, so they don’t build what they’re supposed to build in the timeframe. Is there some sort of force majeure concept to extend the time of the guarantees if they default on the loan, the construction loan, which is the leasehold loan, right? One nice thing about a ground lease for a tenant is, yes, the lender could foreclose, but if they just replace the financing or they pay them off, they go back to status quo. The tenant gets to retain its interest in the ground lease through its leasehold position, and you’re sort of back to square one. So there could have been a default under the leasehold loan. In that scenario, the leasehold lender could have foreclosed and stepped in, had to renegotiate aspects of the project, a variety of different things all could go wrong. The landlord in most of those positions is protected. The risks really come about with sort of how much the other side fights. Typically, a landlord has a faster mechanism to get back their property in those scenarios, but especially in respect of the leasehold lender, if there is a leasehold lender, it’s supposed to provide a little comfort to the landlord in the sense that it’s yet another party who has to perform the work and actually finish the business plan. But if they don’t or if they drag their heels pursuant to the ground lease, that leasehold lender is entitled to a lot of rights. And so the landlord has to kind of give them those rights, give them the opportunity to fix it and an opportunity to stay and keep their collateral. If they don’t, ultimately, then the landlord’s stuck with having to find a new tenant or a new joint venture partner to execute the business plan.

Kevin Bupp: Understood. Given the context of the timeframe, and you probably can’t share the details, but I think you referenced 2019 on this particular example. And obviously we had a black swan event, 2020, that occurred, which had a detrimental impact on the commercial real estate market, specifically on the office market. I’d just be curious to know how this one turned out after that was all said and done. Can you share any just high-level details or maybe not?

Danielle Ash: Well, I mean, I think it’s no surprise that their leasing probably didn’t go as quickly as they would have liked. And they did negotiate some modifications to their lease with their landlord. I think what’s kind of great about a ground lease structure in that particular scenario, particularly where you have sort of a family who’s not really a real estate owner focused and who’s looking to the tenant to actually perform the work and perform the business plan. One thing that’s great about that relationship for the tenant in that scenario and for the developer sponsor, that if the developer sponsor is trying to do the right thing and they’ve really increased the value of the asset, really the landlord’s focused on the rent, right? They’re focused on getting their rent under the ground lease and they will make adjustments over time rather than trying to kick out their tenant or trying to go through this process because if it’s getting an increased value somehow, they’re along for the ride for the long-term. So they’re not really looking to get like a quick turnaround return. So they kind of have an investment and an interest in sort of changing the ground lease to make it work as long as they’re getting sort of a consistent and know they’re going to be protected in that consistent rent flow.

Kevin Bupp: Well, it sounds to me like there’s a better alignment of interest in this type of structure, right? Like all parties are kind of running in the same direction and for the same purpose. So I’d be curious to know, again, maybe using this example or any example, really, that’s applicable here. You know, we’re talking about the value of the improvements themselves and then the value of that actual ground lease, right? Like we’re trying to fabricate and determine what the value of each is. And so how do we get there? How do we, you know, using, again, I don’t know what the total valuation of this property was, but assuming it’s $100 million between the actual value of the ground and the value of the improvements, how do we start arriving at what the actual value is then of that ground lease that’s going to be created?

Danielle Ash: There’s a lot of different ways to do it. I think a lot of market convention now looks at the net operating income of the property and tries to assign a coverage ratio over the rent under the ground lease. So let’s say you know that you’re going to have an NOI of a certain amount for when the building’s built and you’re getting this rent in. You want to make sure that that rent is somewhere in the range of like three times what the rent is that you’re paying under the ground lease to make sure that there’s enough cash flow coming into the site to cover that portion of the rent. That said, the way that ground leases are structured, the tenant’s obligation to pay rent is notwithstanding anything that’s happening at the leasehold position. So during the term of the ground lease, they have to pay rent regardless, and it’s not dependent on whether or not it’s a leased-up property. But generally, that’s one of the ways that people look to create that value and understand the interest. In terms of like a sale leaseback transaction, for example, where you’re doing this as a financing mechanic to structure a capital stack, they’ll look at the NOI as a really big important component. They look at treasury rates and they target based on what the treasury rates are and some sort of margin over that or cap rate over that treasury rate. And they’ll look at the actual value of the property. You could actually get appraisals that bifurcate the interest of the improvements and the land. And the landowner can either own the improvements and the land and then lease both, or they can own the land and lease that and the tenant owns the improvements. The most important thing from a tenant’s perspective in respect of that sort of bifurcation is they get the benefit of depreciation on the improvements themselves. Because if they’re going to put money into it, they’re going to update it, they’re going to increase its value, they want to be able to take the depreciation on those improvements. And so it does need to be structured in some way where they can get that benefit as well, even if the landowner actually owns the improvements.

Kevin Bupp: Talk to me about really understanding the credit quality of the tenant themselves, right? Like from a ground lessor’s perspective, surely one of the value propositions or value components here is the actual strength of the actual tenant themselves, right? So talk to me about how deep in the weeds does that go underwriting the background and credit worthiness of that said tenant?

Danielle Ash: Usually I leave that to my clients to do a lot more of the actual credit worthiness component, but in terms of what we’re looking at in terms of the actual language in the ground lease about like who they can assign the lease to, they’re usually looking at a net worth and some sort of reputation or experience level. They want to have it flexible enough that the tenant can ultimately sell their position to another party, but that party has to be able to manage the asset of the type that they’re managing at the time, right? So usually they look a lot to the experience level and often it’s tied to, you know, they own and operate sites, you know, or size of assets similar to that particular asset. And then there’s a net worth somewhere, you know, in the value, at least of the entirety of the value of the leasehold position, without taking into account the leasehold position, right? So that’s usually like 100% or double whatever the rent or the value of that particular site is to ensure that they have some minimum net worth to cover that.

Kevin Bupp: Understood.

Danielle Ash: It very much depends on like what they’re doing. If they’re doing a construction site versus, you know, they’re buying an existing asset with a lot of management opportunities, it totally depends on the business plan and what they’re doing with it.

Kevin Bupp: And this is quite a common structure. I know that you’re based in New York City. This is my understanding, and correct me if I’m wrong, it’s quite a common structure in a city like New York, right? But is that typically the case in other larger cities across the US?

Danielle Ash: So it is common in a lot of cities. New York is a very mature market just because of the age of the city and the fact that there have been so many sophisticated real estate parties for, you know, 200 years. There are many other places where it’s very common. I’d say around the country, I’ve done ground leases in nearly every state. Texas, California, Florida, a lot of states that you can think of, Oregon, even done a couple there, Seattle. I think there are some places that are definitely more mature markets. I was actually surprised to find that Hawaii actually has a very, very strong ground lease market. And a lot of the places that have those are largely because of the history of those particular sites. You know, Hawaii has a very long history of ground leases because when the state was acquired, there were a lot of native families who retained ownership of a lot of sites. And, you know, there were all these developers who wanted to do projects, build hotels, do all these different things. But those families did not want to give up the value of those assets. And those have been passed down over many, many generations. So you’ll note there’s like a ton of ground leases that were signed in like the early 60s and 70s in Hawaii that all continue to this day. And there’s a very mature market there. So there’s a lot of parties who understand ground lease mechanics there, very sophisticated counsel there who work on those types of transactions. So, you know, it just depends on the circumstance. It also depends on, you know, local jurisdictions and governmental agencies. Many different states and localities, the government agencies will look to ground leases as a means to, you know, enter into RFPs and get developers to build what they want to build, where some will do through a full disposition.

Kevin Bupp: You’d mentioned that 99 years, that seems to be the typical timeframe. You know, what happens after 99 years?

Danielle Ash: It kind of depends. I mean, under the terms of the ground lease at 99 years, the tenant is supposed to give back the property, improvements included. So the landlord is supposed to get the reversionary interest in the ultimate value at that point. You know, most people don’t really care because none of us are going to be around in a 99-year scenario. But oftentimes, I’ve seen several ground leases that have extension rights also, and a lot of the times if the asset is still a well-performing asset at that point, the landlord may continue the ground lease or the tenant may sell it to a new party who’s going to redevelop it or retain it over time. It very much depends on what the parties are going to want to agree to at the time. But by the terms of the ground lease, it’s supposed to automatically terminate. Everything goes back to the landlord at that point. And the presumption is, you know, it’s worth a lot less than it was at the beginning of the ground lease. And so the landlord is still getting the residual value of whatever was improved. But the tenant’s gotten a real great benefit over that 99-year period.

Kevin Bupp: Got it. Got it. You know, it’s interesting to say that we probably won’t be here in 99 years, but with the advancements in healthcare and technology, I don’t know. I feel like in the next 10 years, we might not be saying that, right? The average lifespan might be 110 years by that point. Who knows? So we can only wish, right? But we’d love to shift gears maybe a little bit and move over to the lender side of things. You know, just trying to get from the lender’s perspective, what does a lender need to see before they’re comfortable lending against a leasehold interest? What are they looking for?

Danielle Ash: Well, they need to see the ground lease. That’s the most important thing because that’s really their collateral. So, I mean, as a leasehold lender, you’re really looking for sort of a suite of rights to make sure that you can retain and protect the collateral during the term. One of those is notice and cure rights. Pretty simple, right? If the tenant is going to default or something’s going to happen where the landlord can send a default notice, they don’t pay rent or they’re leaving the property in disrepair, the lender gets a right to receive simultaneous notice of that default and a right to cure it. So they get extra time to actually perform on behalf of the tenant, and the landlord has to accept their performance as actual performance by the tenant. The next are what’s called new lease rights. So a leasehold lender actually gets sort of two bites at the apple. They get that notice and cure to prevent an event of default from coming and preventing the landlord from actually exercising a termination of the ground lease. And they also, if the lease ultimately does terminate, for example, if the tenant files for bankruptcy and then they reject the lease, the leasehold lender is entitled to an additional bite at the apple to get a new lease on the exact same terms as their original borrower or the tenant. So those two rights are the most important. In addition to that, there’s a couple other sort of component rights that are useful, right? So casualties and condemnations are sort of big topics in the ground lease world because it’s the only, one of the only circumstances where there’s this other third party who really cares about what’s going to happen to the asset. And the ground lease usually will give precedence to restoration. No matter what, the landlord wants the tenant to restore, they don’t care whose money it is as long as it’s not the landlord’s money. And they want all the proceeds to be used for the restoration before the tenant or the leasehold lender can take any money out. With a condemnation, this again comes into the ownership of land and improvements to a degree. You know, if there’s a condemnation of the entire site, the value of that award has to be bifurcated between the landlord and the tenant. If there’s a condemnation of a portion of the site, maybe the tenant’s looking for some kind of rent reduction. The leasehold lender wants to participate in all of those discussions, right? And so you have to have direct rights in the lease that actually say they can participate, they have approval rights, they have to get notices and be involved in the dispute, they can put up their counsel. So those kinds of rights are very important to a leasehold lender as well. I would say also the other thing a leasehold lender really wants to look at is the rent, right? Because when the leasehold lender is underwriting, they’re looking at this kind of like a senior loan on the project, right? And they know that, no matter what, they have to pay the rent. They can’t retain their collateral, they can’t foreclose, they can’t do any of those things unless the rent is paid, right? And that also includes any additional rent, so real estate taxes, security costs, things that can result in a lien on the property, insurance, all that stuff. And so they want to make sure that whatever’s in the ground lease is predictable rent, right? That’s why they often look to make sure that there is sort of a CPI catch-up or some sort of escalation that they can predict over the long term, and they’re not going to have any big surprises throughout the term. Leasehold lenders hate often to lend on deals, although they have been, but on deals where there’s a big fair market value reset, for example, where 20 years into the lease, which is during the term of the leasehold loan, there’s a right to change the rent, and that right is based on some sort of mechanic that could result in a really, really big increase in the rent. And they have to underwrite that. So, you know, depending on the lender, they really do want to know what that’s going to be during the term of their loan and for several years after, just in case they have to foreclose, step in, do whatever they’re going to do. Similarly, the term of the lease is very important because by all sort of ratings agency standards, you have to have a minimum of 50 years left on the term in order for a leasehold lender to really want to make the loan because of that sort of residual value, right? They have to be comfortable that if you’ve got a 10-year loan and it takes you four years to foreclose or get through the process, right, you’re going to still have value that you can then subsequently sell or whatever you’re going to do there. So 50 years is sort of like the standard on a ratings agency basis. And that’s why one of the many reasons why 99 years is nice because it’s at least two sort of cycles.

Kevin Bupp: So is it safe to say that in a newly structured ground lease, a lot of how the ground lease is written, the language behind it, is it influenced by a lender? I mean, do you get the lender involved ahead of time, and are they part of that discussion early upstream?

Danielle Ash: Yeah, I mean, I think in every ground lease transaction that I’ve done where I’m representing the landlord, and honestly, the tenant too, you want to have your full capital stack kind of set up as soon as possible and all together. And you do want to—like you may not always have the leasehold loan at the time you close on the ground lease as the tenant. So you do want to make sure that you are kind of vetting the ground lease for a future transaction leasehold lender as well and ensure that it’s sort of a market structure that they’d be comfortable with at the time, taking into account those underwriting standards.

Kevin Bupp: Got it. No, I appreciate that. Very insightful. You know, we’d love to switch gears before we wrap up the show here today and talk about a sale leaseback. We’ve been talking about the standard ground lease type of transaction. But we’d love for you to maybe share, you know, maybe what the difference of what we’ve been speaking about to what a traditional sale leaseback looks like. And then I think more specifically, and if you could provide an example, what is a sale lease back? The basics of it. Typical transaction would be helpful. Maybe an example of a recent one that you’ve done and why this structure versus what we’ve been talking about in a more traditional ground lease structure.

Danielle Ash: I’m going to take this. It’s not entirely just sale leasebacks. It’s any sort of ground lease financing structure. And I will say that just because I’ve done many deals where instead of the future tenant being the current owner of the site, it’s a third party. And so the tenant is trying to acquire from that third party this site and they use the ground lease mechanic as a means to acquire it as well. So it can work in either scenario, but for purposes of this, we’ll call it a sale leaseback. So in a lot of those scenarios, the ground lessor in that scenario, right, they’re a type of party, as I mentioned, who’s looking for a long-term coupon clipping type of investment. They’re looking at it sort of like a bond. They’re investors who want to stay there for the long term. They’re not looking for a massive return in a short period of time. It’s sort of a more modest return over a longer period. And often actually, if you look at sort of IRR rates that they actually achieve, based on the amount of dollars that they put in, they only start to get that in like the first 20 years because they’re really about keeping the lease in place for long term and kind of getting that return. But essentially what happens is, let’s say I’m a developer, I either see a site that I really want or I own a site that I wanna develop. I might look at a fee execution where I’m gonna find debt and I have to find equity. The debt usually requires something in the range of 15% of my equity has to be invested in the project, right? And I can usually get debt to include the acquisition price and construction. Construction loans right now are notoriously very expensive. They’re volatile because they’re variable interest rates. They have high rates because they’re the sort of highest risk type of loan. And the bigger the loan, the bigger the risk and the bigger the cost. In addition to that right now, equity capital is crazy expensive and very difficult to find, if not impossible. So now you’re looking at these two circumstances where you have to fill a bunch of gaps and the costs of actual construction are going up and up and up, right? So you’re in this scenario where it’s very tight markets to find that. In comes a ground lease provider. They say, okay, looking at your asset, if I priced a ground lease in this particular way, I could buy the asset from you for $50 million, right? I’ll give you that $50 million, and you give me a ground lease right at the same time for 99 years. Okay. I will own the fee. I get a rental stream that we’ve established. But you can take that $50 million and you can put it into the deal. You can either acquire the site outright or if you already own it, you can put that towards the actual construction costs. And now you have part of the capital stack covered by the ground lease proceeds. So now your construction loan can be less. Maybe the equity capital is already covered or there’s a portion of the equity that’s not included anymore. And oftentimes in these deals, they work the best when you don’t really need another equity partner because the ground lease proceeds really cover the equity piece that you would have needed to get the construction loan at the pricing you really want. So those are great scenarios. I’ve done a ton of deals like that for development projects. A whole bunch of deals, particularly utilizing either 421A or 45X real estate tax incentives in New York City. Those are mostly multifamily rental sites. They’re great assets for ground leases because again, it kind of keeps a stable sort of leverage point on the asset over that full period of time. It’s less expensive than the equity you would get and it reduces the amount of the construction loan you need. So the balloon payment at the end of that is much lower. It’s easier, hopefully, in the next two to five years to actually pay it off. And so those types of deals have worked very well. We’ve done them with several different sponsors, several repeat sponsors, actually, on behalf of Montgomery Street Partners as the landlord. In case it’s helpful, too, I have done ones where they’re not development deals, like where they’re an existing asset, and there may be like a business plan to do some recap or they want to take money out of the asset. Those are also great opportunities too, because, you know, again, they will, the ground lessor will pay the purchase price for the full site. That purchase price can then be used by the tenant for whatever they want, as long as they’re paying the ground rent under the ground lease.

Kevin Bupp: I’d be curious to know, obviously, as we record this summer of 2026, you know, that both the debt and the equity markets are, have been quite challenged. Have you seen transactional volume in these various structures? Has it been quite slow over the last couple of years or what are you seeing in your practice today?

Danielle Ash: My ground lease practice has been pretty consistently busy over the last several years. I’d say that, you know, in particular, there’s been a lot of ground leases on affordable housing. There’s a ton of affordable housing deals out there. I know Safehold’s been very busy on those types of deals, particularly with low-income housing tax credits, where there’s been a big equity gap, and this has been a useful tool to be able to kind of fill some of that gap. I’ve also done a fair number of deals with families and with churches and other groups who want to monetize their site, want to renovate their site, get real value from it, and haven’t had the opportunity. And so they’ve been looking at doing ground leasing. And I think because of the market right now, it’s a great opportunity. I think every deal that has any little bit of distress or that’s had a really tough time raising capital—because you usually have to raise the equity capital first, right? A lot of them have turned to ground leases because there’s a lot more flexibility with a partner who wants it for 99 years because they can look at it sort of in the long term. They know that maybe today it’s not going to have a turnaround right away, but maybe they will in the next 10 or 15 years, and that’s worth it to them.

Kevin Bupp: Danielle, what haven’t I asked you? I know there’s a lot. I mean, we could unpack quite a bit more here, right? Like we’ve just really touched at such a high level on this ground lease and sale leaseback structure. But just, I guess, generally speaking, again, assuming that some folks might not be overly familiar or just have a general understanding of this, but is there anything I haven’t asked you today that would help folks that are tuning in just better understand these concepts that we’re discussing?

Danielle Ash: Like for my benefit, I think guarantees are a big part of ground leasing as is tax structuring. And that’s not to say I’m just making a plug for myself, but in general, I think having good counsel is really important on a ground lease. They are a bit more complicated than your typical acquisition a lot of the time. Much like any sort of joint venture that’s a long term contract, it’s a 99 year contract, right? There’s a million different things that could come up during that term. And you need someone who understands what’s market for what a ground lease is to both make it marketable to get leasehold financing, to make sure you can sell it if you’re the tenant or sell it if you’re the fee owner. That you have the protections in place that are going to make it consistent with what market practice is, is really important because if you end up with a lease that nobody wants, you end up in a bunch of litigation or misery later down the line. And, you know, the guarantee component to that is really important, I think, to both sides. I think for a landlord, you know, you really do need a credit worthy party because just like in any other deal, you would expect that the tenant is an SPE who owns nothing but that leasehold interest. But you do want to make sure, right, that they’re going to complete the work they said they’re going to do or they give you an environmental indemnity, right? The landlord should basically come out with absolutely no risk, no liability, no responsibility with respect to the project other than getting their coupon.

Kevin Bupp: Getting their coupon, getting paid. I love it. Okay. And so, you know, I’m assuming, you know, just for the sake of the conversation, you would typically get involved with a client. I mean, way upstream, right? Like when they’re starting to have initial conversations, considering one of these types of structures, like you get involved at that point in time because there’s so many complexities and just so many nuances associated with these types of structures. Again, these are long-term contracts. I’m assuming that you get involved very upstream. Is that correct?

Danielle Ash: Yeah, we get involved usually when they’re starting to think about what the business plan is. And actually our firm makes capital connections for parties as well as actually doing the legal work. So a lot of the times when a client comes to us and they say, I have this asset, I want to do this with it. Here’s the business plan. It’s impossible to find equity. Can you make some introductions? One of the first things we often say to them, have you looked at ground lease financing or CPACE? Those are two very useful structures where you might be able to get the kind of capital you need with a different type of party. And so we talk to them early on, what does a ground lease entail? What are the rights you should expect? How would it look? We introduce them to different parties. And then we kind of work with them at that point to make sure they’re structuring and thinking about all the issues that could come up in that term.

Kevin Bupp: Yeah, no, fantastic. Well, Danielle, this has been a fantastic conversation. You know, I really appreciate you just taking the time to share your expertise and, you know, really just, I think, break down the mechanics of what is a fairly complicated topic into something that is just easy to understand, and just very practical in nature. So for those that want to learn more about you or connect with you and your team, what’s the best place to reach you?

Danielle Ash: I’m a very avid LinkedIn person, so I’m very easy to reach on LinkedIn. Danielle Ash. I’m at Adler and Stachenfeld. You can look me up there. My information is also on our website at adstach.com, A-D-S-T-A-C-H.com. And you can always reach out to me that way as well.

Kevin Bupp: Okay. Well, fantastic. Well, thank you, Danielle, for coming to the show. And everyone listening, just thank you for joining us again for another episode of the Real Estate Investing for Cashflow podcast. If you found value in today’s conversation, please do subscribe, leave us a rating and review, and do share the episode with someone that you feel would benefit from it. And as always, continue learning, continue growing, and most importantly, continue investing with intention. So we will see you on the next episode. Take care.

Danielle Ash: Thank you so much, Kevin.

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