Institutional Ground Leases: The Safehold Model and Reversion Economics

Ground Leases as an Institutional Asset Class

The institutional ground lease is one of the most underallocated asset classes in commercial real estate. Less than 1% of U.S. commercial real estate is held in ground lease structures, according to AFIRE's 2024 International Investor Survey conducted with Raymond James, despite a risk-return profile that the same research characterizes as AAA-equivalent credit risk with a 7.5% unlevered IRR over a 99-year term. The disconnect is structural: ground leases are illiquid, require specialized underwriting, and produce returns that institutional allocators struggle to benchmark against traditional property types.

The modern institutional ground lease — as distinct from the legacy ground leases that have existed for centuries — was effectively reinvented by Safehold Inc. (NYSE: SAFE), formerly iStar Financial. Safehold took a dormant legal structure and rebuilt it as a scalable institutional product, complete with standardized documentation, a publicly traded vehicle, and a mechanism for monetizing the long-tail reversion value that makes ground leases so compelling but so difficult to underwrite.

Understanding the Safehold model is not just about understanding one company's strategy. It's about understanding how ground leases function as an investment vehicle — the economic logic, the risk allocation between lessor and tenant, and the embedded optionality that makes a ground lease position fundamentally different from either a bond or a direct property investment.

The Safehold Model

Safehold's model separates the land from the improvements and creates a ground lease on the land component only. The tenant retains full operational control of the building, collects all operating income, and pays a contractual ground rent to Safehold. At lease expiration (typically 99 years), the property — land and improvements — reverts to Safehold.

The model works because land and buildings have fundamentally different risk profiles. Land appreciates over time (it's non-depreciable, supply-constrained, and benefits from urban density). Buildings depreciate physically and functionally (they require capital expenditure, become obsolete, and eventually need replacement). By separating ownership, each party holds the component best suited to their investment thesis:

• Safehold (ground lessor): Holds the land, which appreciates. Collects contractual rent during the term. Receives the entire property at reversion. Takes no operating risk — no tenanting, no capex, no management. The position behaves like a very long-duration inflation-protected bond with equity upside at maturity.
• Property owner (ground tenant): Operates the building, collects NOI, pays ground rent as a fixed cost. Benefits from lower cost of capital (because the land cost is converted from equity to a periodic lease payment, reducing the equity required to acquire the property). Trades reversion value for lower basis and higher current returns.

Safehold prices its ground leases to make both positions economically attractive. The ground rent is set below the property's return on the land component, creating positive leverage for the tenant. As of Q4 2025, per Safehold's annual report and 10-K filing, the portfolio consisted of 112 ground lease positions with a weighted average remaining term of approximately 88 years and a combined property value (land + improvements) of $15.9B.

The 30-45% Cost Basis Math

Safehold's most important structural feature is the relationship between its cost basis (what it pays for the ground lease position) and the combined property value (the total value of land + improvements at the property).

Safehold typically acquires ground lease positions at 30-45% of combined property value. On a $100M property, Safehold's investment — the price of the ground lease — is $30-45M. The remaining $55-70M represents the tenant's equity in the leasehold interest. Safehold's 30-45% cost basis buys three things:

1. Ground rent for the lease term. Typically structured as 2.0-3.5% of land value, with annual or periodic escalations (CPI-linked, fixed, or hybrid). This generates current yield of approximately 4.5-5.5% on Safehold's cost basis.
2. Land reversion at lease expiration. The land reverts to Safehold at the end of the 99-year term. The value of the land at that point depends on location and long-run appreciation, but even modest assumptions produce substantial terminal values over a century.
3. Improvement reversion at lease expiration. The improvements also revert. At 99 years, the original building may have been demolished and replaced multiple times — but whatever improvements exist on the land at expiration belong to Safehold.

The 30-45% cost basis creates embedded upside. If the combined property value is $100M today and the property appreciates at 2.5% annually, it will be worth $1.15B in 99 years. Safehold paid $35M for a position that produces current income and eventually controls a $1.15B asset. The gap between $35M and the present value of the total cash flows (ground rent + reversion) is Safehold's embedded value creation.

Reversion Economics

The reversion is both the most valuable and the most difficult-to-underwrite component of a ground lease position. In present-value terms, a 99-year reversion is nearly worthless — discounted at 7.0%, $1.15B in 99 years is worth approximately $1.3M today. But the reversion is not purely a present-value exercise. Its significance lies in three dimensions:

1. The Reversion Creates Asymmetric Upside

Safehold's current income from ground rent produces a baseline return — roughly 4.5-5.5% on cost basis. The reversion is pure upside above that baseline. If the property appreciates faster than assumed (3.5% instead of 2.5%), the terminal value at year 99 is $2.9B instead of $1.15B. If the property happens to be in a location that benefits from secular urbanization or infrastructure investment, the upside is even larger. The ground lessor participates in 100% of this appreciation without bearing any operating risk during the term.

2. The Reversion Shortens Over Time

While a 99-year reversion is nearly negligible in PV terms, the reversion on a 30-year remaining term is substantial. At year 69 of a 99-year ground lease, the remaining 30-year reversion on a property worth $600M (after 69 years of appreciation at 2.5%) discounted at 7.0% is approximately $78M. The reversion becomes increasingly material as the lease matures — and this is when Safehold's position becomes most valuable relative to its cost basis.

3. Renewals Reset the Clock

Many ground leases include renewal options — typically at fair market rent — that extend the lease term. If the tenant renews, the ground lessor gets another 30-50 years of ground rent (at the reset market rate), and the reversion pushes further out. If the tenant does not renew, the property reverts. Either outcome favors the ground lessor: renewal means higher rent; non-renewal means immediate reversion. This embedded optionality is rarely priced correctly in standard DCF models.

The CARET Mechanism

Safehold's most innovative financial engineering is the CARET structure — Capital Appreciation Reversion Exposure Token. CARET addresses the fundamental problem of ground lease investing: the reversion value is enormous in nominal terms but nearly worthless in present-value terms because it sits 99 years in the future. CARET converts that embedded, unrealized value into a tradeable position.

Safehold tracks its Unrealized Capital Appreciation (UCA) — the difference between the combined property value of its portfolio and its aggregate cost basis. As of December 2025:

Table 1 — Safehold portfolio metrics as of Q4 2025. The $9.3B UCA represents the embedded appreciation that Safehold has not yet realized. CARET units were privately valued at $1.75B, implying an ~19% capitalization rate on the UCA.

CARET units represent interests in this unrealized appreciation. When Safehold sold CARET units to MSD Partners (Michael Dell's investment firm) in 2022 at a $1.75B valuation, as disclosed in Safehold's investor presentation accompanying the transaction, it effectively monetized a fraction of its reversion rights decades before lease expiration. The $1.75B valuation against $9.3B in UCA implies that the market assigns roughly 19 cents on the dollar to Safehold's unrealized appreciation — a deep discount that reflects the time value, illiquidity, and uncertainty of 99-year reversion claims.

The CARET structure serves two purposes. First, it creates a mechanism for Safehold to realize value from its reversion rights without waiting for leases to expire. This addresses the core tension in ground lease investing: the best part of the return is locked up for a century. Second, it gives investors a way to buy exposure to long-duration urban land appreciation — a risk factor that doesn't exist in any other publicly accessible investment vehicle.

Why Institutions Don't Own Ground Leases

If ground leases offer AAA-equivalent credit risk with a 7.5% unlevered IRR, why does less than 1% of institutional capital allocate to them? AFIRE's International Investor Survey identifies several structural barriers:

• Low absolute returns relative to equity real estate. A 7.5% unlevered IRR over 99 years is attractive on a risk-adjusted basis — but institutional real estate investors typically target 8-12% unlevered returns on core properties and 15-20% on value-add. Ground leases sit in an awkward middle ground: too low for equity allocators, too illiquid for fixed-income allocators.
• Duration mismatch. Most institutional investors have 7-10 year hold periods. A 99-year ground lease generates most of its value from the reversion, which only materializes at maturity. Selling a ground lease position in the secondary market requires a buyer with the same long-duration thesis — and that buyer pool is thin.
• Lack of institutional expertise. Ground lease underwriting requires specialized knowledge: two-asset valuation, reversion discounting, escalation structure analysis, subordination implications. Most institutional CRE teams lack dedicated ground lease expertise because they encounter these structures infrequently.
• Limited market depth. The investable universe of institutional ground leases is small. Safehold's $6.7B portfolio is the largest — but that's a fraction of the $20T U.S. commercial real estate market. Pension funds and sovereign wealth funds that need to deploy $500M+ into a strategy can't achieve meaningful allocation to ground leases.
• Accounting complexity. Ground leases create classification challenges under ASC 842 (GAAP) and IFRS 16, as discussed in the ABA Real Property Section's analysis of ground lease accounting. The lessee classifies the ground lease as an operating lease or finance lease depending on specific criteria, which affects balance sheet presentation and income statement treatment. This complexity discourages some institutional investors from adding ground leases to portfolios that are already difficult to report.

The result: ground leases remain a niche strategy dominated by Safehold and a handful of private vehicles, despite a theoretical risk-return profile that should attract far more institutional capital.

Ground Lease Funds

Beyond Safehold's publicly traded vehicle, a small but growing ecosystem of ground lease investment platforms has emerged:

Safehold (NYSE: SAFE) remains the dominant platform with $6.7B in cost basis and 112 positions. The merger with iStar Financial in 2023, detailed in Safehold's S-4 registration statement and subsequent proxy filing, consolidated the management structure and eliminated the external management agreement that had created conflicts of interest. Post-merger, Safehold operates as a self-managed REIT focused exclusively on ground lease origination.

Private ground lease funds have emerged from institutional sponsors targeting the same risk-return profile. These vehicles typically target portfolios of 10-20 ground leases in gateway markets, underwriting to a 5.0-6.5% unlevered yield on cost basis with long-duration appreciation upside. Minimum investments range from $5-25M, and hold periods are open-ended or 15-20 years — longer than typical private equity real estate funds.

Family offices and endowments are natural ground lease investors because of their permanent capital base and tolerance for illiquidity. A ground lease purchased at 35% of combined property value with a 5.0% current yield and 99-year reversion matches the investment horizon of a multigenerational family office far better than it matches a 10-year fund.

The ground lease market is expected to grow as more property owners and developers recognize the capital efficiency of separating land from improvements — and as more institutional investors develop the underwriting expertise to evaluate these positions.

Common Mistakes

These errors surface repeatedly when practitioners analyze institutional ground lease positions — either as potential investors, counterparties, or lenders:

• Discounting the reversion at too low a rate. Applying a 5% discount rate to a 99-year reversion overstates its present value dramatically. The reversion is speculative at long durations — it depends on assumptions about appreciation, property condition, urban development, and tenant behavior over a century. Appropriate discount rates for 99-year reversions are 7-9%, reflecting the compounding uncertainty. Moving from 6% to 8% reduces the PV of a $1.15B reversion from $2.7M to $0.3M.
• Ignoring the improvement reversion. At lease expiration, Safehold receives both the land and the improvements. Many models only value the land reversion, ignoring the building. While the original 2025-vintage building will not exist in 2124, whatever replacement improvements sit on the site will revert. This is additional value — modest in PV terms at origination, but material if the lease is approaching expiration.
• Treating CARET as a simple NPV calculation. CARET units are not simply the NPV of the reversion. They represent a participation in unrealized appreciation that can be realized through multiple mechanisms: lease renewal, lease restructuring, property sale, or actual reversion. Valuing CARET requires optionality analysis, not just DCF.
• Assuming constant appreciation rates. Running a ground lease model with a flat 2.5% annual appreciation rate for 99 years ignores the path dependency of real estate values. Properties go through cycles of value creation and destruction. A Monte Carlo approach with mean-reverting appreciation rates produces more defensible reversion estimates than a deterministic growth assumption.
• Comparing ground lease yields to bond yields directly. Ground leases share characteristics with bonds (contractual income, credit risk, duration) but also with equity real estate (appreciation, reversion, land value participation). A ground lease yielding 5.0% is not directly comparable to a corporate bond yielding 5.0% because the ground lease includes appreciation optionality and reversion rights that the bond lacks.
• Underestimating the tenant's incentive to renew. At year 85 of a 99-year ground lease, the tenant faces a choice: renew at fair market rent or lose the improvements at expiration. If the building has economic life remaining, the tenant almost always renews — because walking away means forfeiting the entire building. This renewal dynamic is valuable to the ground lessor (more rent) and should be modeled as a probability-weighted outcome.

How to Model It

Modeling an institutional ground lease position requires a different workbook structure than a standard property acquisition model. The key difference: you are modeling the ground lessor's position, not the property's operating cash flows.

Ground Rent Income Tab

Annual ground rent for the full lease term (99 years). Escalation structure: CPI-linked (project CPI annually or use a long-run average of 2.5-3.0%), fixed (typically 2.0-2.5%), or FMV resets (model as a step function every 10-20 years, with the reset tied to projected land value). The rent schedule should be buildable year-by-year — no shortcuts. A 99-year model with CPI escalations at 2.5% starts at $2.5M and reaches $28.5M by year 99.

Reversion Tab

Project the combined property value at lease expiration using an assumed appreciation rate. Run sensitivities on the appreciation rate (1.5%, 2.0%, 2.5%, 3.0%, 3.5%) — the range of outcomes is enormous at 99 years. Discount the terminal value back to present using a rate that reflects the uncertainty of the projection. Separately model the renewal scenario: if the tenant renews at year 99, project a new ground rent stream based on the property's fair market land value at that point.

UCA / CARET Tab

Track combined property value and cost basis annually to compute rolling UCA. Apply a capitalization rate to the UCA to estimate the CARET value at any point in time. The 19% rate implied by the MSD Partners transaction is one data point — institutional investors should develop their own views on appropriate CARET capitalization based on portfolio composition, remaining term distribution, and market conditions.

Returns Tab

Compute unlevered IRR from the ground lessor's perspective: initial investment (cost basis), annual ground rent income, and terminal value (reversion or sale of the position). The IRR should be calculated over multiple hold periods (10, 20, 30, 99 years) because the return profile changes significantly depending on the exit timing. Early exits (10-15 years) depend heavily on the sale price of the ground lease position; long-term holds depend on the rent escalation and reversion.

Related Articles

This article is part of the ground lease underwriting series. Each article covers a specific dimension of ground lease analysis:

• Ground Lease Underwriting — Leasehold vs fee simple valuation and cap rate adjustments.
• Rent Reset Mechanisms — CPI, FMV, and hybrid escalation structures.
• Subordination and Financing — Impact on LTV, loan sizing, and lender requirements.