Why Ground Leases Are Quietly Becoming the Go-To Capital Solution for Apartment Developers

Multifamily developers facing equity requirements of 35% to 45% of total project costs are increasingly turning to an alternative capital structure that could redefine how apartment projects get funded: the modern ground lease. Safehold, the publicly traded ground lease company, has positioned its product as a solution to the dual challenges of scarce equity and rising construction costs that have stalled projects across major U.S. metros. Rather than seeking out traditional ground-up development deals, Safehold provides capital by acquiring the land beneath a development site and leasing it back to the developer on a long-term basis—typically 99 years. This structure immediately reduces the developer's basis, freeing up capital for vertical construction and reducing the overall equity check required from institutional partners.

Key Details

Safehold's ground lease model works by separating the ownership of the land from the improvements. The developer retains full operational control of the property and benefits from appreciation, while Safehold collects a fixed ground rent over the lease term. Key elements of the structure include:

• Lease Term: 99 years, providing developers with long-term certainty comparable to fee ownership
• Capital Deployment: Safehold typically funds 25% to 35% of the total project cost, replacing more expensive equity layers
• Pricing: Ground lease rates generally price 150 to 300 basis points below traditional mezzanine debt, offering a meaningful cost savings
• Developer Control: The sponsor maintains complete control over operations, refinancing, and eventual disposition
• Property Types: The structure applies to both new construction developments and the recapitalization of existing stabilized assets

According to Commercial Observer, Safehold's approach has gained particular traction in high-barrier coastal markets where land costs represent a substantial portion of the overall project basis. By monetizing that land value upfront, developers can achieve leveraged returns that would otherwise be unattainable in the current rate environment where SOFR-linked construction loans frequently exceed 7.5%.

Market Context

The ground lease resurgence arrives at an inflection point for multifamily finance. Traditional capital stacks—once dominated by agency debt, bank construction loans, and institutional equity—have been disrupted by the Federal Reserve's tightening cycle. Bank construction lending volume dropped by roughly 50% year-over-year in 2024, and private equity funds have dialed back their real estate allocations, targeting IRRs above 18% for new development commitments.

That gap has created an opening for alternative structures. Safehold's ground lease effectively replaces a portion of the equity tier with lower-cost capital, compressing the blended cost of the stack and making pro formas pencil out where conventional financing falls short. For developers in markets like New York, San Francisco, and Los Angeles—where land acquisition alone can consume 20% to 30% of total project costs—the savings are meaningful enough to resuscitate projects that were previously shelved.

The broader implications extend beyond individual deals. If ground leases become a standard component of the multifamily capital stack—alongside senior debt and sponsor equity—it could unlock a wave of development that the market desperately needs. The U.S. faces a projected shortfall of 4.3 million apartment units by 2035, according to data from the National Multifamily Housing Council. Capital solutions that lower the barrier to entry for new construction are not just financial innovations—they are essential tools for addressing the housing supply crisis.

For CRE professionals, the takeaway is that deal structuring flexibility matters more than ever. Sponsors who understand and can deploy tools like ground leases will have a clear advantage in a market where capital remains constrained but demand for housing continues to grow.