Bifurcation is the word for splitting real property into a fee interest and a leasehold interest. It is not a financing, not a loan and not a partnership. It is a division of ownership, and almost everything else follows from that.
Before bifurcation, the land sits in the owner's basis doing nothing until the property is sold or refinanced. After it, the land has been converted to cash at closing and the operator pays rent for the use of it.
That trade is the entire proposition. A sponsor gives up the reversion to the dirt in ninety-nine years and gets the value of it now. Discount anything ninety-nine years out at a commercial required return and it rounds to a fraction of a percent, which is precisely why the capital is inexpensive relative to equity.
Tenants do not know. Their leases are with the operator and nothing about their occupancy changes. The operator continues to manage, lease, renovate and sell the improvements.
Depreciation stays with whoever owns the improvements, which is the leasehold owner. Land was never depreciable anyway, so bifurcation does not cost a deduction that existed.
Appreciation on the building accrues entirely to the leasehold. The landlord's return is the rent and its escalations, nothing more. There is no participation, no promote and no share of the sale.
In a subordinated ground lease the landlord agrees its fee can sit behind the leasehold mortgage. If the tenant defaults, the lender can wipe out the landlord's position. Landlords charge for that risk, and most institutional land capital will not take it at all.
In an unsubordinated ground lease the fee stays ahead. The leasehold lender lends against the leasehold and takes a package of mortgagee protections instead: notice and cure rights, a new lease on rejection, and consent rights on amendments. This is the standard institutional form and the only one we write.
A related question people forget to ask: can the landlord mortgage the fee ahead of the lease? Agency leasehold guidance requires that the landlord's own fee mortgage be subordinate to the ground lease. Ours is never mortgaged ahead of it.
Bifurcation moves the most money where land is the largest share of cost: build-to-rent, manufactured housing, outdoor storage, hotels, surface-parked suburban product and entitled development sites. It moves least on a vertical infill deal where land is a small fraction of a high construction cost.
It requires income, or a credible stabilized case, because rent is sized as a percentage of stabilized NOI. It is not land banking capital.
No. It is a sale of the land and a lease back. There is no principal, no maturity, no amortization and nothing to refinance.
The leasehold owner. The operator keeps the improvements, the depreciation and all appreciation on them.
The improvements revert to the fee owner. At ninety-nine years that reversion has a present value close to zero, which is why the rent is affordable.
Yes, and it routinely is. A leasehold mortgage secured by a long unsubordinated lease with proper mortgagee protections is ordinary institutional lending.
Both. The fee and the leasehold are separately transferable. The lease governs consent and transfer mechanics on each side.
No. Their leases are with the leasehold owner and are unaffected.
Stabilized NOI and total project cost or purchase price. We will show you the land price, the rent, the coverage and what it does to the equity requirement.
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