Investor Memo: Land Lease Mathematics

To: Limited Partners & Co-Investors From: ColdPort Investment Committee Date: May 22, 2026 Subject: Enhancing Yield Through Ground Lease (Land Lease) Architectures

Executive Summary

In the capital-intensive arena of cold storage development, the acquisition of prime, infill land represents a massive upfront capital outlay that heavily dilutes the overall yield on cost. To optimize equity efficiency and maximize Internal Rates of Return (IRR), ColdPort strategically utilizes Ground Leases (Land Leases). This memorandum deconstructs the mathematics of the ground lease structure, detailing how bifurcating the land from the vertical improvements drastically reduces equity requirements, enhances depreciation benefits, and drives outsized returns for our Limited Partners.

The Mechanics of a Ground Lease

In a traditional real estate development, the sponsor purchases the land in fee simple (absolute ownership) and subsequently constructs the building upon it. The sponsor’s capital stack must fund 100% of the land cost and 100% of the hard construction costs.

A Ground Lease fundamentally alters this structure. The sponsor (ColdPort) enters into a long-term lease (typically 50 to 99 years) with the landowner. ColdPort pays the landowner an annual ground rent, giving ColdPort the absolute right to construct, operate, and finance the vertical improvements (the cold storage facility). At the end of the 99-year term, ownership of the building theoretically reverts to the landowner, though these leases are typically renegotiated or bought out decades before expiration.

The Yield Enhancement Mathematics

The financial power of a ground lease lies in the reduction of the initial equity burden. Consider a $50 million cold storage development, where the land costs $10 million and the vertical construction costs $40 million.

Scenario A: Traditional Fee Simple Purchase

• Total Cost: $50 Million
• Debt (60% LTC): $30 Million
• Required Equity: $20 Million
• If the stabilized asset generates $4.0 Million in NOI, the Yield on Cost is 8.0%.

Scenario B: Ground Lease Structure ColdPort leases the land rather than buying it. The landowner charges a 6.0% return on the $10 million land value ($600,000 annual ground rent).

• Total Capital Required (Construction Only): $40 Million
• Debt (60% LTC on building): $24 Million
• Required Equity: $16 Million (A 20% reduction in required capital)
• The property generates $4.0 Million in gross NOI, minus the $600,000 ground rent = $3.4 Million Adjusted NOI.
• The Yield on Cost on the vertical development ($3.4M / $40M) expands to 8.5%.

By removing the non-depreciable, low-yielding land component from the capital stack, ColdPort achieves a higher yield on a lower equity base, instantly driving the IRR upward.

Extreme Tax Efficiency and Depreciation

The ground lease structure provides profound tax advantages. According to the IRS, land is a non-depreciable asset. When a fund purchases a $50 million property where $10 million is land value, they can only depreciate $40 million.

Under a ground lease, ColdPort owns 100% of the vertical improvements and 0% of the land. Therefore, 100% of our capitalized costs are depreciable. Furthermore, the annual ground rent paid to the landowner is a fully deductible operating expense. This structure maximizes the tax shield, ensuring that a higher percentage of the operational cash flow is distributed to Limited Partners on a tax-deferred basis.

Risk Mitigation and Capital Markets Execution

Ground leases also serve as a powerful acquisition tool. Many legacy landowners (families, corporations, or municipalities) in prime logistics corridors refuse to sell their land due to generational attachment or massive capital gains tax liabilities. A ground lease allows them to retain ownership and generate passive income, unlocking prime development sites that are otherwise inaccessible to traditional cash-buyers.

To ensure the asset remains financeable and saleable, ColdPort utilizes "financeable ground leases." These legal structures include explicit protections for leasehold lenders, ensuring that the bank can step into the sponsor's shoes in the event of default, and granting ColdPort the right to sell the leasehold interest (the building) to institutional buyers seamlessly.

Conclusion

The ground lease is an exercise in financial arbitrage. By stripping away the low-yield, capital-intensive land component, ColdPort creates a highly leveraged, hyper-efficient capital structure. This methodology allows us to deploy less equity, maximize the depreciable tax shield, and isolate our capital squarely on the high-yield, operational aspects of the cold storage facility, resulting in fundamentally superior risk-adjusted returns.

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