Ground rent financings have grown in popularity, as rising interest rates have pushed borrowers to look for cheap ways to refinance their debt.
The deals typically involve selling the freehold of a site to an investor, who then receives a regular payment of ground rent. At the end of the deal, which can last over 100 years, the debtor usually has the chance to purchase the freehold back for a nominal sum.
Effectively then, it is a form of amortising secured debt, differing from a standard property sale and leaseback arrangement in several ways.
Rather than the occupier paying a market rent, in a ground rent transaction it normally pays a lower sum, which rises with inflation, perhaps subject to a cap and a floor.
In a sale and leaseback, any option for the tenant to buy a property back would normally be at the market price.
Considering ground rent financing as secured debt, the lender has excellent enforcement rights. In case of default, the investor retains the freehold.
Missing a payment is therefore extremely uneconomical, so the ground rent payments can effectively be considered “super-senior”, one source who works in the area told GlobalCapital.
Last week, Morrisons, the UK supermarket chain, became the latest firm to engage in a ground rent financing. The transaction raises £331m for Morrisons, while investment firm Song Capital will receive secured income from 76 supermarkets for the next 45 years.
Some reports claim the transaction is helping Morrisons cut its debt. While the details of the transaction are not public, if it follows the format of a typical deal, that may only be true in a technical sense.
From an accounting point of view, the liability may appear in a different line of Morrisons' financial statements. But it is a liability nonetheless.
The deal might make Morrisons' financing cheaper to service, but in exchange for that, Song has the security of 76 supermarkets.
On paper, Morrisons has sold assets on its balance sheet to cut debt, but if the deal works like others in the space, that will be temporary.
The supermarket also gives up the option to sell these sites at market prices and move away during the life of the deal.
That might be worth it for the lower financing cost. Others have taken the same route, including Asda, which raised £400m last year with a ground rent deal, though a release at the time said it retained "its freehold property interests".
In practical terms, however, the deal is unlikely to have cut Morrisons' total liabilities much.
Ground rent financings are not a marvellous map to buried treasure. It's pretty hard in finance to get something for nothing. Ground rent financings are a form of debt and that should not be forgotten.