An introduction to long lease real estate – ground lease, sale & leaseback and income strip
This is an informative paper providing an introduction to current demand from investors seeking long-dated, secure, index linked rental income allowing owner-occupiers to realise capital from
existing freehold or long leasehold property and ensuring a secure, ongoing occupational interest.
We evaluate three principal methods of releasing capital from existing freehold or long leasehold property. The options reviewed can provide alternatives to bank debt or other capital raisings and can be implemented within a circa 3 to 6 months timescale if capital is required.
Ground Lease
This is basically a low risk ‘sale and leaseback’, for both occupier and investor, where the purchaser is typically a UK pension fund. It provides the occupier with long term security of tenure; with the potential to recover the freehold for a nominal sum; a low and therefore, sustainable rent; and a high multiple paid by an investor for the rent received. The model is tested and proven for occupiers that require long term occupational security but want to release capital.
Sale & Leaseback
An established method of releasing capital from property holdings and generally more widely adopted than ground leases or income strips. The occupier would sell the asset to an investor and simultaneously take a lease for a fixed period, generally 15 to 35 years and at a market rent.
Income Strip
The freehold or long-leasehold property is sold to an investor with an option to buy back the freehold (or long-leasehold) at the end of the leaseback term, typically 30 to 40 years. Most effectively used by government, public sector and quasi public sector bodies, such as universities, with investment grade financial strength, as an option to release capital from property holdings but retain ownership in the longer term.
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