Ground Leases Boost Affordable Housing Amid Rising Costs

Affordable housing developers are increasingly utilizing 99-year ground leases to finance projects, a trend gaining traction in expensive markets due to scarce capital and rising construction costs. Two recent transactions exemplify this shift. The Pacific Companies, an affordable housing developer, secured a 99-year ground lease with Safehold for a 256-unit tax credit project in Santa Cruz County, with completion anticipated in 2028. Shortly thereafter, The NRP Group entered into a similar lease with Safehold for a 336-unit project in northeast Austin, also slated for delivery in 2028. Both developments are situated in high-cost areas and are leveraging 4% Low-Income Housing Tax Credits (LIHTC).

Ground leases, historically more common among government entities and nonprofits, are now becoming a mainstream financing tool for affordable housing development. Institutional investors are marketing these leases as "gap filler" capital for LIHTC projects. Steve Wylder, head of investments at Safehold, explained to HousingWire TBD that developers face persistent capital gaps, exacerbated by high construction costs and elevated interest rates, which ground leases help to overcome. These leases allow developers to bypass the significant upfront cost of purchasing land, freeing up capital for construction.

California, in particular, has been implementing aggressive reforms to increase housing supply. Lawmakers have enacted measures such as legalizing accessory dwelling units, expanding density bonuses, and streamlining approval processes. A significant overhaul of the California Environmental Quality Act (CEQA) last year aimed to shield apartment projects from lengthy environmental reviews, a move developers have quickly capitalized on, even as local governments seek to delay projects. Despite these efforts to reduce red tape and increase density, the cost of land remains a substantial hurdle that ground leases are helping to address by separating land ownership from development costs.