Creation of ground rent properties – An expansion of the financing and marketing options for real estate assets
A ground rent property is created through the legal separation of the land from the building. Thereafter, both assets can be independently acquired, financed and marketed. This typically expands the refinancing options for real estate investors significantly, as a long-term financing through the ground lease allows for a more focused asset / liability match of the financing structure. The typical ground lease contract ensures the utilisation of the ground by the owner of the buildings for minimum 100 years or more. The utilisation rights are secured by land register entries, which allows for an exit of the ground value without control over the building and its cash flow. The proceeds from the exit of the land can be utilised for an equity release or a reduction of the bank debt.
Ground lease contracts are a very long refinancing option without any amortization requirement within the structure. The structure also provides for potential tax benefits notably in terms of the tax shield of the ground lease payments and the advantages in terms of the tax barrier rules (“Zinsschranke”) in Germany. A ground lease concept therefore allows for an optimisation of both, the cash flow margin as well as the post tax profits.