Market Backdrop
Rising construction costs and tighter capital pools are forcing affordable housing developers to rethink how land and financing are arranged. The traditional model of owning land outright is giving way to longer-term arrangements that separate land ownership from building ownership, a shift that investors say helps preserve LIHTC economics when costs run high. The phrase ground leases taking root is entering the industry lexicon as more sponsors weigh long-term land arrangements against the traditional purchase path.
Deals That Signal the Shift
Two high-cost markets have become early proving grounds for this approach. In Santa Cruz County, The Pacific Companies secured a 99-year ground lease with Safehold for a 256-unit LIHTC project. The Soquel-area development is slated to deliver in 2028, with the tax credits supporting the project despite the absence of land ownership by the developer.
Days later, The NRP Group closed a parallel 99-year lease with Safehold for a 336-unit project in northeast Austin, also targeting a 2028 completion. Both deals hinge on 4% LIHTC and rely on ground leases rather than outright land purchases to keep project economics intact amid higher costs and borrowing rates.
- Unit counts: 256 (Santa Cruz) and 336 (Austin)
- Lease term: 99 years
- Tax credits: 4% LIHTC
- Land ownership: leased land instead of purchased
- Delivery window: 2028
Investor Perspective: From Niche Tool to Gap-Filler Capital
Institutional investors are increasingly marketing ground leases as a practical bridge in LIHTC financings. Steve Wylder, head of investments at Safehold, explains that the approach helps bridge persistent gaps created by high construction costs and elevated interest rates. "Developers are doing the hard work of delivering affordable housing, but the funding gaps remain a hurdle that must be bridged," Wylder said.
How Ground Leases Work In Practice
Under a typical arrangement, the land is owned by a separate entity, while the developer controls the improvements and day-to-day operations. The landowner collects ground rent over a fixed term—often 99 years—while the project remains eligible for LIHTC incentives as long as the ownership structure preserves the intended tax status. At lease end, options vary, but many structures allow for transfer of ownership or a continuation of the lease on favorable terms, preserving long-term affordability goals.
Policy Environment: Red Tape Easing, But Local Hurdles Remain
California policy makers have moved to streamline housing approvals, increase density, and reduce environmental review friction in select cases. These reforms aim to accelerate construction and lower soft costs, though local governments can still experience delays as they balance growth with community concerns. The rise of ground leases adds a new layer of capital discipline to the financing mix, even as regulators monitor risk and return dynamics in LIHTC projects.
Market Outlook: A Growing Tool As Costs Stay Elevated
Industry observers expect ground leases taking root to become a more common option in affordable housing finance as capital remains tight and construction costs stay elevated. The trend is particularly visible in markets with strong LIHTC demand and high land costs, where lease-based structures help preserve subsidy economics without transferring land costs to developers. With 2028 delivery timelines for the first wave of projects, lenders and investors will be watching interest-rate trajectories and materials pricing closely.
Key factors to watch include:
- Capital stack optimization: greater LIHTC equity paired with ground lease financing
- Risk separation: isolating land costs from construction and operations
- Regulatory shifts: potential further streamlining or changes to LIHTC mechanics
As more sponsors embrace land arrangements, developers report faster closing processes and clearer capital plans. The market for ground leases taking root is likely to widen beyond California and Texas into other high-cost metros over the next 12 to 24 months, particularly as state housing programs stabilize and private lenders seek steady LIHTC exposure.
Discussion