The connection between a mid-1800s Hawaiian king and a 21st-century real estate investor may not be as distant as you think.

Hawaii-based Jay Shidler, who has purchased nearly 2,000 properties, manages many of them using an investment strategy that has dominated real estate in his home state for the past 175 years.

The flexibility of this strategy has been on full display in Chicago, where the 78-year-old Shidler and his affiliates have vacated three office buildings in recent years while maintaining ownership of the land beneath them.

It helped Shidler, who declined to be interviewed, weather a storm of adversity that punished his Chicago offices in a way that few investors in the city could.

Leasing the land back to a building owner can continue to generate income from an asset that is struggling to retain tenants. And it’s a business model that’s much older than the state Shidler calls home.

In 1848—more than a century before the archipelago became an American state—King Kamehameha III divided the entire territory of the islands among his family, the government, and other high-ranking members of society.

This has resulted in generations of landowners benefiting from long-term land ownership by renting the land to those who want to build on it or use existing buildings for residential or commercial purposes.

Since the mid-1970s, Shidler has replicated a modern version of this across the United States, purchasing property with the aim of separating ownership between a land owner and a building owner, creating long-term land leases that often last 99 years. Fueled by his success in land leases, Shidler’s empire spans a dozen ventures, including the industrial REIT, First Industrial.

But when the pandemic wreaked havoc on the office market, his time-tested business was put to a new test.

Since 2012, Shidler and its affiliates have purchased four office buildings in prime locations in downtown Chicago and near O’Hare, with the intention of splitting them in half (splitting the land and building assets) and eventually selling the leasehold interests (the building).

Things didn’t quite go as planned.

Three of the four buildings fell into some foreclosure following the pandemic.

Alliance HP, a Shidler subsidiary, tried to sell its leasehold interest at 300 West Adams in the loop but later defaulted on its loan and the Triangle Plaza loan near the airport. Both buildings were taken over by lenders, while other Shidler subsidiaries retained ownership of the land.

However, Shidler Group was able to sell its leasehold interest in another office building at 200 South Michigan in 2019.

Alliance sold its interest in the office building in Chicago’s historic Burnham Center to Chicago-based firm Golub & Company, but then ran into trouble when the firm stopped making ground lease payments. A $42 million foreclosure lawsuit against the Shidler subsidiary is pending and could jeopardize Golub’s ownership of the land along with his ownership of the building.

While today’s troubled market may impact Shidler’s current profitability, three of its four land leases remain intact.

Even when the lender takes back the keys to a property, rent payments continue uninterrupted because the bank is often in a difficult situation.

For Shidler, no matter how many new investors try and fail to profit from his buildings, playing the waiting game can still pay off.

A. bargain with a catch

Shidler’s method of dividing property by bifurcation made the investment vehicle more common for those who did not inherit land.

And asking to purchase land beneath an existing property owner’s building can be difficult.

“The best way to create this (land lease) structure is to do it yourself,” said NYU real estate professor David Eyzenberg.

It’s an often overlooked way of doing business in real estate, but it generated an estimated $19 billion in revenue in the U.S. over the past five years, according to a study by commercial real estate research group IBISWorld.

And like Shidler, Hawaii remains a top player.

In 2022, Trepp found that the value of land lease loans in Hawaii totaled $1.4 billion, trailing only New York and California.

Over the past decade, investment firms focused solely on land leases, such as publicly traded Safehold, have begun marketing the assets as low-risk, long-term investments. They tend to focus on leases with fixed land rental payments increasing at a slow and steady rate for predictable returns.

Family offices and small-scale investors, on the other hand, often establish leases that require renegotiation of the rent after, for example, ten years.

“If you can’t renegotiate your land lease, that’s often the crux of the deal because your costs are kind of static.”
John Thomas, Chicago real estate investor

This allows the landowner to increase rents at much higher rates if market demand permits. This can also lead to negotiations ending up in court.

Considering this, the investment vehicle that provides safe returns for land owners may increase risks for building owners.

“If you can’t renegotiate your ground lease, that’s often the crux of the deal because your costs are kind of static,” said Chicago real estate investor John Thomas.

Thomas is no stranger to Shidler’s assets. He tried to buy 300 West Adams at auction but got into a legal battle with co-investor Igor Gabal that was recently settled in Gabal’s favor.

The building sold for a record low price of $17 per square foot, and the land rent was also included in the discount. The 99-year ground lease payments started at $1 million annually in 2012 (when Shidler purchased the property) and will increase 3 percent annually to $2.5 million annually.

“After paying off the rent, we had very little money left to operate the building,” Thomas said.

Thomas said he even made an offer for the land below 300 West Adams, but that offer was rejected by a company affiliated with Shidler. It would take a very magic pen to make the numbers work when the building is only 50 percent occupied.

Ezyenberg emphasized that some office buildings will still experience difficulties with or without ground rent.

“I think probably 80 to 90 percent of this is office issues and then 10 to 20 percent is land lease issues,” he said.

Despite this, Shidler began offering new ways to persuade buyers to purchase leasehold interests.

In 2021, Shidler Group signed its first “convertible land lease” backed by an apartment complex in Houston. Instead of the traditional contract structure that leaves the building back in the hands of the land owners at the end of the 99-year lease period, the convertible lease ensures that the land is transferred to the building owner.

And like many land lease investors, Shidler appears to be moving away from the office market.

“In a perfect world, you would want to rent a lot under a building where you have a diversified list of tenants and no single tenant can take you down. That’s why I love multifamily and self-storage,” Eyzenberg said. “If you have a Class A office with a lot of tenants, it’s okay. But if… you have an office tenant, you are screwed.”

But offices aren’t the only properties causing problems for the Shidler Group. The firm is also eyeing possible foreclosure after recently defaulting on a $204 million CMBS loan tied to a hotel portfolio.

Shidler now sets his sights on a new goal, and it could be the key to solidifying the legacy of his nearly 50-year career.

C.an audible voice

When University of Hawaii at Manoa School of Business Dean Vance Roley first approached Shidler, hoping for a donation from a prominent alumnus, little did he know that the two would form a friendship that would last years.

And that relationship transformed the school.

Shidler has contributed $238 million to the university over the past 18 years through a combination of cash and land leases, Roley said.

After his initial donation of $25 million in 2006, the business school was named after him.

While a wealthy philanthropist giving away money from his alma mater isn’t exactly uncommon for someone like Shidler, Roley said his interactions over the years have made it clear that the real estate investor is understanding and thoughtful about every move he makes.

“He is one of the smartest people I have ever met,” Roley said.

He’ll need that pragmatism as he turns his attention to multifamily investments. Still, uncharted, potentially choppy waters could keep the land-leasing empire afloat.

And it didn’t start small.

Last year, Shidler launched a $250 million preferred equity fund aimed at recapitalizing multifamily properties with high-cost variable-rate debt and approaching maturities. The agreements provide for 99-year convertible land leases on the properties.

A shift to multifamily land leases could play a role in the nation’s short supply of affordable housing because it could lower up-front costs for developers, according to his firm’s website.

A multifamily developer in California recently tested this theory by selling its land to Safehold. The developer will pay the rent for the land, but likely at a lower cost than the loan to purchase it.

There is still risk regardless of asset class.

The Shidler Group sold the Fort Lauderdale complex last year for $84 million after paying $108 million a year earlier.

“The people selling it bought the property with the intention of selling it quickly, but it was a land lease agreement,” said then-buyer Andrew Gordon. “As the market began to turn and interest rates rose, this business plan failed to move forward.”

The Florida deal was far from the only investment the firm has made since its move into multifamily.

Shidler Group has acquired the land underlying 13 multifamily properties with more than 3,900 units in 2022 alone, according to its website.

Ultimately, the performance of these assets and others could signal whether Shidler’s new ground leases will benefit multifamily operators or cause similar headaches felt by office lease owners.