How Ground Leases Can Cut Your Down Payment and Improve Real Estate Cash Flow

Gordon Wolf (00:00)
yeah, for sure. Because the ground rent is priced cheaper than a mortgage. It’s less than 6 % and it’s just rent. So you can think of it. I mean, I’m going to say this again. We’re not a lender. We’re a title-based co-buyer. You can think of rent as interest only. So now you’re not amortizing anything down. So the cash flows do get better from that point of view. And this is why it’s really attractive for investors is because you have this lower

initial equity check that you’re writing, you’re generating the same monthly revenues on actually a lower ⁓ PIDIA, principal interest, taxes, insurance, and association news, or in this case, ground rent.

Dylan Silver (02:13)
Hey, folks, welcome back to the show. Today’s guest, Gordon Wolf, is a sales leader at Cedar, where he helps single-family rental investors unlock more deals without tying up additional capital by using a ground lease model that changes how portfolios scale. He’s also an active real estate investor himself with holdings across both short-term and long-term rentals. Gordon, thanks for joining us today.

Gordon Wolf (02:37)
Thanks for having me, Dylan. Really excited to be here today.

Dylan Silver (02:39)
Now, what is a ground lease model?

Gordon Wolf (02:41)
Yeah, so ground leases are pretty common here in the US in commercial real estate and pockets of residential in the United States. And then it’s quite common in residential spaces internationally. Think about the UK or Singapore. And then in commercial ground leases here in the States, you know, also super common across various property types, whether it be office, industrial, retail, hospitality, whatever it may be. But

leaseholds are not super common or mainstream in the American residential space. There are pockets where it’s more common than others, call it Hawaii and parts of Florida, but generally speaking, it has not been a mainstream product in America here in the residential space.

Dylan Silver (03:30)
Walk me through what this looks like. What’s the structure there?

Gordon Wolf (03:33)
Yeah, so we can, let’s talk about how we plug in at the point of acquisition. We also have a product that can be used for homeowners that already own their home, but let’s talk about the product we have at the point of sale. So let’s just put, you know, let’s put some numbers to it. So say that there’s a home buyer or an investor looking to buy a $500,000 house. How they would typically finance that is 20 % equity and 80 % mortgage financing.

you come to us, we will actually contribute up to 50 % of the total properties value, regardless of what the land value is actually worth as a percentage of the overall properties value, which effectively reduces the home buyer or investors purchase price to just the building. So $500,000 example, we come in and commit $250,000.

That means that the new effective purchase price for the investor or home buyer is now $250,000. So maintaining that 20 % equity down payment, now your down payment is cut in half from $100,000 to $50,000. 20 % of 250K is $50,000. And now you also have a smaller leasehold mortgage. So I’ll stop there.

Dylan Silver (04:53)
Now, when would be the best use case for this versus traditional?

Gordon Wolf (05:45)
Yeah, so that’s a great question. I would say the best use case, mean, our product really works in a lot of different cases, but I would say the best use case is a first time home buyer that doesn’t have the down payment capabilities to get into a house today, but they don’t want to continue to rent. So this is almost like a hybrid model allowing them to own the building and rent.

the land. Some other popular use cases we have is people that are applying for a mortgage loan and they’re in the jumbo territory, meaning they need to put more down payment down. And with us buying the land, now the mortgage loan size that they have falls below that conforming limit, allowing them to qualify for conventional financing, which is cheaper and allows them to put less money down. We also

help with the DTI constraints. So if someone is DTI constrained, we will come in and help out there too.

Dylan Silver (06:46)
Now, this be considered ground leases, be considered non QM lending or is this something different entirely because it’s not a loan?

Gordon Wolf (06:55)
Yeah, another great question to, you know, kind of beat a dead horse here. We are not a loan at all. We’re a title-based co-buyer and our ground lease contracts are fully, are constructed to be fully compliant with FHA, VA and agency leasehold underwriting guidelines. So no, it’s not a non-QM product. It is, you know, an agency eligible product.

Dylan Silver (07:20)
So to get granular, when you talk about a co-buyer, if someone is not able to come to the table with enough down payment in order to get them to qualify, but they have decent credit and they know that, the cost of the land is really what’s prohibitive in this circumstance, would that be an example where ground lease model would make sense?

Gordon Wolf (07:44)
for sure. And just to kind of touch base on it, know, to touch back on why we can contribute more to the transaction than what the land is actually worth without getting too much into the nitty gritty details. You have to, you know, eventually buy us out because if we’re contributing 50 % of the capital to the contribution at initiation.

when there is a dissolution or when we end the agreement, when you want to buy us out at any point during the 99 year lease, you can buy us out at any time. The buyout price is tied to the property’s value, not the land’s value. So that’s why we’re able to contribute up to 50 % of the property’s value, regardless of what the land is actually.

Dylan Silver (08:24)
Now, as a co-buyer, would, and I’m sure each situation is going to be different, would the lender in each case then consider the down payment that you would bring as just like the buyer’s down payment or would they look at this as two separate entities, if you will?

Gordon Wolf (08:42)
Two separate and that’s why I kind of opened it with title-based co-buying. We are taking title to the land. Cedar is taking title to the land and the home buyer or investor is taking title to the leasehold under a 99 year ground lease. So they still have to put the same percentage down on this leasehold value, but the value is cut roughly in half. And if they want to, if they still want to put down,

the same down payment, now your monthlies get a lot better because all you pay during term as a client of Cedars is accretive ground rent. It’s priced lower than a mortgage and it’s rent. So you’re not amortizing anything. And then if you look at the other part of your capital stack as a home buyer, you have a smaller mortgage balance. So all of that to say your monthly’s will now be lower as well.

if you want to put the same downpainting down.

Dylan Silver (09:41)
Now, if you and I’m just thinking out loud here, if someone was to go take out a traditional mortgage, they own the land, they own the real estate or the real property versus ground lease where they’re renting the land and they own the real property. there in most cases truly a cost savings month to month as far as cash flow out?

in the ground least situation.

If we looked at it as two slices of the pie, right? So you’re paying for the mortgage for the house, paying the rent for the land. In most cases, they’re truly a cost savings versus just traditional.

Gordon Wolf (10:54)
yeah, for sure. Because the ground rent is priced cheaper than a mortgage. It’s less than 6 % and it’s just rent. So you can think of it. I mean, I’m going to say this again. We’re not a lender. We’re a title-based co-buyer. You can think of rent as interest only. So now you’re not amortizing anything down. So the cash flows do get better from that point of view. And this is why it’s really attractive for investors is because you have this lower

initial equity check that you’re writing, you’re generating the same monthly revenues on actually a lower ⁓ PIDIA, principal interest, taxes, insurance, and association news, or in this case, ground rent.

So you’re getting all of these fatter cash flows upfront on a lower equity base, meaning your cash on cash improves tremendously and your IRRs are also better throughout the term.

Dylan Silver (11:47)
Part of me wants to get granular and ask you about specific situations, but I feel like we would need numbers in front of us here. I’m particularly curious though, I know investors are what we’re talking about here today, but I’m particularly curious about, do you see this as being something that could have mass adoption to address the housing crisis right now for folks who can’t get into homes?

Gordon Wolf (12:09)
for sure. This was primarily constructed as an affordability mechanism, but we’ve expanded our verticals to single family rentals, short-term rentals, and multifamily. And within the multifamily category, we can do conventional, of course, but we can also do students, senior living, military housing, whatever it may be. So yes, it is an affordability tool, but from an investor’s perspective,

It’s a new piece to the capital structure where they don’t have to put as much equity in. So you can also think of it as an affordability tool from their point of view.

Dylan Silver (12:44)
Is there a typical lease length for the ground lease? it a 99-year lease? Is there a typical lease length?

Gordon Wolf (12:52)
Yeah, it is 99 years. And that is one of the underwriting requirements that the agencies require. Because if your lease term is shorter than the mortgage, then that gets a little bit hairy and lenders won’t lend on that. So they need the lease term to be longer than the mortgage term. And in our case, it’s 99 years. You can buy us out at any point from day one all the way through 99 years. Additionally, the lease structure is fully transferable. So you could sell the home as a leasehold

and then the new buyer assumes the ground run contract. Or you can sell the home as fee simple, use the proceeds to buy out Cedar. And then the homeowner now will own a fee simple home, whoever the buyer is.

Dylan Silver (13:35)
How is the land value determined? Is it based on an appraisal at the time of sale?

Gordon Wolf (13:40)
We have our own internal automated valuation methodology. And we just take a percentage of the overall properties value. So again, we’re not kind of.

dividing up the two pieces, the two components in a property, the building and the land, and looking at what the land is worth. We’re looking at what the overall property’s value is, making some adjustments. Say it’s near a federal waterway or near a cliff, some sort of environmental risks. We may contribute less to the transaction, but yeah.

Dylan Silver (14:52)
Now, are there any specific geographic markets where you’re seeing maybe more interest in or more adoption in than others?

Gordon Wolf (15:00)
Yeah, let me talk about our geographic capabilities real quick. So we’re active in 49 of the 50 states. We are not active in Maryland and obviously DC and then no U.S. territories. And then in terms of where we’re seeing the most activity, I would say, you know, that’s driven mostly by population and home prices. So Texas, Florida, California, New York, Pennsylvania kind of stuff. Less so from the Dakotas, Wyoming kind of thing.

but we can still do deals there. We just see less.

Dylan Silver (15:32)
I’m interested in who the typical buyer is that would be using a ground lease. Of course, investors may be more savvy with these types of tools, but also too, I’m a realtor in Texas. I’m wearing my realtor hat now. I’m thinking, I’m surprised I haven’t heard of this because I would love to be able to explain the benefits of this to folks who may be needing that type of assistance. Is there one

type of co-buyer or individual where you feel like is more inclined to reaching out or to doing this type of due diligence.

Gordon Wolf (16:10)
Yeah, I mean, kind of back to what I was saying before, if you have a home buyer that isn’t qualifying for DTI constraints, or maybe they don’t have enough down payment, or maybe they need to get just enough down payment to, you know, completely knock their PMI off, or maybe they…

need a smaller loan so that they can qualify for a conforming loan rather than a jumbo loan, which comes with higher rates and higher down payment requirements. Those are your obvious kind of first layer of use cases.

Dylan Silver (16:42)
Have you also seen this as something that maybe, and again, I don’t want to misconstrued it as a lending product, but if folks are looking at like DSCR loans because of debt restraints, this could be something that they might also be looking at as another option.

Gordon Wolf (17:01)
Yeah, I mean, we’re so like you said originally when you were introducing me, I am a single family renter investor myself and I’ve used Cedar on an acquisition and it’s been great. I didn’t have to put nearly as much money down and still got the same exposure in terms of rents. Obviously my HPA is gonna be limited because I have to share with Cedar, but now I still get these same cash flows.

which increases cash on cash and IRR as well.

Dylan Silver (17:30)
Bonus question for you. I’m imagining that there’s lots of situations that can come up which can be a little bit more complicated than others. For instance, if someone is doing some type of value add rehab to the property and it’s a distressed asset, how does that change things? Like if someone is purchasing a heavily distressed asset.

Gordon Wolf (17:51)
Yeah, so kind of two things you can do there. So someone is purchasing a heavily distressed asset. This is actually what I do in my strategy here. I typically buy in cash and then I only do a cash out refinance. So our product not only works at the point of sale, but we have an adjacent product similar to a cash out you can think of that works when someone already owns a property. So we could come in there.

and your property would be fully rehabbed and stabilized. And then we would come in at that point once we’re ready for cash out refi. But if you wanna use the funding at the, you know, our co-buying mechanism here at the point of sale, the initial purchase, we have another buyout structure specifically designed for that. So the one that I was detailing before, two buyout structures, one is appraisal linked. So if the home.

Let’s go back to the $500,000 example goes to 1 million over whatever time period you want it to be 10 years, 20 years. And we put in 50 % initially. That means that we are now going to have to be paid out 500,000. So the proportionate share in our appreciation. So the fixed rate buyout, this is the other type of buyout. And this doesn’t look at any of the improvements you make at all.

it’s not tied to the future value of the home. It’s just a cruise at a fixed rate. So if you buy a house for a hundred thousand dollars, put in $200,000 worth of rehab work, and now it’s worth $500,000, we’re not going to share in that upside. We’re going to share in a fixed return on the $100,000 original property value. Obviously we’re not going to be buying all 100%, only 50%.

So we wouldn’t share in the upside that you create. It would be a fixed return.

Dylan Silver (19:44)
I am curious to get your feedback on some of the emerging spaces that I’m seeing a lot of people getting into and if this might be applicable in any of those. For instance, when folks are looking at storage facilities or modular homes, tiny home communities, mobile home parks even, ground leases being a commercial product originally, are you seeing popularity in those spaces as well?

Gordon Wolf (20:07)
So we only do residential. So self storage is when we do residential and we’ll call it sub-institutional multifamily, less than 100 units. But like I said, it doesn’t have to be just conventional multifamily. can be student housing, military, seniors, anything like that. Manufactured housing is also a little bit tricky and typically not something we do because the land is owned by not the owner of the building. But we could, in theory,

by the entire land of the entire, all of the land of the manufactured housing community. But it wouldn’t really help with the home buyer situation at all, because they’re already in that situation.

Dylan Silver (20:48)
Well, you’ve got the wheels spinning in my head here thinking about all the use cases for this. are coming up on time here, Gordon, any new projects that you’re working on. And then also, what’s the best way for folks to reach out to you or your team?

Gordon Wolf (21:01)
Yeah, so the best way to reach out to us, you can email me directly at [email protected] That’s G O R D O N at get cedar G E T C E D A R dot com, or you can toggle to our website, www.getcedar.com and fill out the questionnaire there for one of our home advisors to reach out to you. That’s more so on the retail side.

you know, people purchasing primary, secondary vacation homes. If you’re an institutional buyer or maybe call it, you know, mom and pop, single family rental investor, short-term rental investor, you should reach out to me directly. Again, my email is [email protected]. And then in terms of new projects, I would say, you know, kind of something that I had mentioned earlier is we’re really building out, you know, now this institutional.

Use case so SFR, single family rental, short term rental and multi family.

Dylan Silver (21:58)
Thank you so much for joining us today, Gordon. Thanks for your time.

Gordon Wolf (22:00)
Thanks Dylan, chat soon.