Ground leases are problem-solving capital. On a deal with a real capital problem, the land is usually the cheapest large check available and the structure earns its keep. On a healthy deal, it is complexity with nothing to pay for it. Here is the screen we run on every deal that comes in — five fits, three walk-aways — including against our own interest.
| The five fits (the math dominates) | The three walk-aways (keep your fee) |
|---|---|
| 1. A maturity or workout wall — the refi will not size and the servicer wants principal. 2. A construction or completion gap — the equity requirement is the blocker, or the project stalled. 3. An expensive layer that will not leave — double-digit pref, hard money, an assessment riding the tax bill. 4. A partner problem — a buyout, a defaulted pref, a JV you want whole. 5. An affordable recap — year-15 or year-30 capital where rents cannot move and new debt does not fit. |
1. No problem to solve — stabilized, cheap debt available, nothing stuck. The complexity has no payoff. 2. Coverage is not there — if stabilized income cannot cover the rent 3–4x, the deal is too thin for permanent rent. 3. The exit is a leasehold-shy buyer pool — near-term sale plans in small private-buyer markets argue against it. |
The one-line version: if the alternative to land capital is expensive (rescue pref, dilution, a fire sale, losing the deal), the ground lease usually wins. If the alternative is cheap (a conventional refi that sizes), keep the fee. Send the deal and we will run the screen with you — both directions.
Three questions: Is there a real capital problem (maturity, gap, expensive layer, partner, recap)? Does stabilized income cover the proposed rent 3-4 times? Does the exit plan tolerate a leasehold (institutional or hold-long exits do; small private-buyer flips often do not)? Three yeses and the math usually dominates every alternative.
Almost always, and it is not close: mid-6s non-amortizing versus 10-18% compounding, with no control rights and no promote taken. The pref is cheaper only in the sense that you can pay it off someday — which is also the argument for not needing it in the first place.
Because the alternative was worse: losing the deal, diluting into a JV, or carrying double-digit paper. Ground leases are chosen by owners solving real problems, which is why the structure concentrates in workouts, gaps, and recaps rather than in healthy stabilized deals.
Yes — it is the first screen we run, and it kills more deals than it passes. A ground lease on a deal with no problem is complexity without payoff, and putting one there helps nobody, including us.
Send the address, the income, the debt, and the problem. The screen comes back fast, both directions — and if the answer is keep your fee, that is the answer you will get.
Email us the property