Horizontal development gets funded first and produces nothing until the community leases up. No construction lender advances against raw dirt, so it comes out of equity and sits there through the longest, least productive stretch of the schedule.
On a vertical deal the land is bought, the loan closes, and construction converts cost into rentable space fairly quickly. On BTR the horizontal work comes first, takes longer, and produces no rent at all. Equity funds it, and that equity sits dead through the entire horizontal phase.
Which means the sponsor's return is dragged by the piece of the project with the least risk attached to it. Dirt in a growth submarket is not the speculative part of a BTR deal. Lease-up is. But the capital structure charges equity pricing for the safe part.
We buy the land at closing and lease it back for 99 years, unsubordinated. The sponsor keeps the homes, the depreciation and every dollar of upside, and the equity requirement drops by the land price on day one.
On a multi-phase community it does not require the whole parcel at once. Each phase can be taken as it is capitalized, which matches how BTR actually gets built and financed. Rent is sized at 25–30% of that phase's stabilized NOI, capitalized in the mid 6s, fixed, with 2% annual escalations and no fair market value resets.
Fair, and mostly true. A ground lease adds a document and a counterparty. The question is not whether that is simpler — it is not — but whether the equity reduction is worth the complexity on a given deal.
That is an arithmetic question with a specific answer, and it is different on every deal. On a BTR community where land is a third of basis, the number is usually large enough to be worth a conversation. On a vertical infill deal where land is 12% of cost, often it is not. Run it before deciding.
Just the land. The sponsor owns the improvements, depreciates them, and keeps all the upside. We own dirt and collect rent.
Yes, and on a phased community that is usually the right way. Each phase is priced off its own stabilized NOI as it is capitalized.
It shrinks it, because the leasehold capitalization is smaller. That usually helps sizing and helps the guarantor test.
Yes, when it is unsubordinated with proper mortgagee protections, has a fixed ascertainable rent with no reappraisal resets, and runs well past loan maturity. Those are the criteria published in the agency leasehold guidance and we write to them.
As-complete stabilized NOI and total cost for that phase. That is enough for a land price, the annual rent and the coverage.
Send as-complete stabilized NOI and total cost for the next phase. A number back inside a week.
Email us the property