Ground leases taking root in affordable housing deals as costs rise

Ground leases are reshaping how affordable housing developers finance projects amid scarce capital and rising construction costs.

Two recent deals show the trend taking hold in expensive, reform-minded markets.

In Santa Cruz County, The Pacific Companies, an affordable housing developer in the West, closed a 99-year ground lease with Safehold for a 256-unit tax credit project. The Soquel-area development should open in 2028. Days later, national developer The NRP Group closed a similar lease with Safehold for a 336-unit project in northeast Austin, also targeting 2028 delivery.

Both sit in high-cost markets. They rely on 4% Low-Income Housing Tax Credits. Both use ground leases instead of outright land purchases.

Once used mostly by government entities and nonprofits, the tool is becoming mainstream in affordable housing development. Institutional investors now market ground leases as “gap filler” capital for LIHTC projects.

“Developers are doing the hard work of meeting the demand for affordable housing in their communities, but they are struggling with the gaps that are very persistent across markets,” Steve Wylder, head of investments at Safehold, told HousingWire TBD. “High construction costs and elevated rates create gaps that become a challenge that needs to be overcome.”

Land costs not part of reforms

California lawmakers have been aggressively cutting red tape and enacting zoning reform to increase housing supply more quickly. They legalized accessory dwelling units, expanded density bonuses and streamlined approvals. Lawmakers are trying to do more while blunting resistance from local governments.

Last year’s overhaul of the 1970 California Environmental Quality Act went further, shielding apartment projects from lengthy environmental reviews altogether. And developers took advantage immediately, even as local governments found ways to delay projects.

The state also enacted a law last year that overrode local zoning to permit by-right construction of multifamily housing near transit. Projects have emerged as cities have had to meet a July 1 deadline to create new maps detailing where development could go.

But reforms did little for land affordability. Coastal cities like Santa Cruz continue to face high site costs and environmental constraints that reform never touched.

Texas has a similar story. A state law now allows multifamily and mixed-use housing to be built “by right” in areas within the state’s 19 largest cities that were previously zoned for single-family use only. Austin lawmakers implemented zoning reform ahead of the state and have been celebrated as a model for bringing down rent prices.

Rental prices have dropped for consecutive months in Austin. But reform had little impact on land prices, and interest rates continue to strain budgets.

Ground lease impact on land costs

Typically, a public agency or nonprofit owns the land leased to a developer. NRP has previously built on land owned by a government entity. Last year in Texas, the Harris County Housing Finance Corp. selected NRP as master developer of Hardy Yards near downtown Houston, involving a 99-year ground lease with the agency.

The developer pays ground rent instead of a purchase price. Lenders typically treat that rent as an operating expense, freeing up capital for construction and permanent financing.

Seeing growing demand, Safehold launched an affordable housing-specific platform last year. Its broader portfolio spans hospitality, life science and commercial office space but leans heavily toward multifamily now.

“What we’re doing ultimately is positioning our capital as a tool to bridge gaps and help move these projects forward through a 99-year lease structure and bringing to bear very low cost of capital,” Wylder said.

The arrangement also locks in long-term controls. Landowners can write affordability rules directly into the lease. Those rules can outlast the standard tax credit compliance period.

Overcoming old objections

Traditional ground leases carried a well-known flaw: steep, unpredictable rent increases that created uncertainty for developers, lenders and tenants alike, according to industry commentary on older-style leases.

Modern ground leases address the uncertainty. Safehold’s version locks in a 99-year term with fixed 2% annual rent increases, capped CPI resets and no fair-market or percentage-rent resets, removing the spikes that plagued older structures.

That predictability is central to the pitch. Ground rent is priced below the cost of conventional debt, embedded in the operating budget rather than reset at the landlord’s discretion. Even with that fix, lender comfort took time to build.

“There’s still sensitivity and a perceived sense of risk among debt and equity sources about ground leases,” said Nick Polidori, an NRP executive and developer on the Austin project, told Nareit. “Safehold had to provide a lot of education for us, but I think it will be more widely accepted in the future as more developers learn about it.”

That education gap is exactly what regulators in California are moving to close through oversight rather than persuasion. State rules specific to LIHTC deals require developers to document original land costs and cap what a ground lessor can charge above that basis, preventing leases from functioning as a hidden markup.