Using Bifurcation to Reduce Initial Equity Injection for Investors

As the principal and lead partner at AIA in New York City, Dean Britton sources and formulates capital structures for real estate developments and recapitalizations. Along with his colleagues, Dean Britton has closed over $1 billion in new ground lease investments since 2008.

Ground lease agreements are common in commercial real estate. In many cases, the government and generation-owned landowners prefer them. However, the arrangements result in two estates: the land upon which the improvement sits and the improvement itself. The lessor enjoys more predictability and financial security than the lessee, who operates the improvement.

Bifurcation separates the ground and improvements into two separate leasehold interests. Investors sell the ground fee to a third party to reduce the amount they are putting in the investment and focus on the property, hoping for reliable cash returns and tenants. However, the feasibility of the agreement depends on the lease period before the land reverts to the owner and the prospective return on investment on the property within that period.