The subject of ground leases has actually shown up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the process of creating an Advanced Concepts Module for our realty monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great time to share my Ground Lease Valuation Model in Excel.

This model can be used standalone, or contributed to your existing property-level design. Either way, it is useful for both landowners aiming to size a ground lease payment or leasehold owners looking to comprehend the worth of the leasehold (i.e. improvements) relative to the cost basic interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the ideas of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor rents the land (i.e. ground) just. In the case of a ground lease, generally one celebration owns the land (i.e. charge easy interest) while a different celebration owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the improvements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will typically own the enhancements on the land and use the land and enhancements as if the lessee were the owner of the land. During the term of the ground lease, the lessee will pay rent to the lessor for use of the land. At the end of the ground lease term, the lessee needs to return usage of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime places, where landowners do not always wish to offer but where they might not have the know-how (or desire) to run. Thus, they rent the land to somebody who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this quite often with office complex in the downtown core of major cities.

Another case where you'll run into ground leases are in retail shopping centers. Oftentimes, popular retail occupants choose to develop and own their area however the designer doesn't always desire to offer the land. So, the retail renter will accept rent the ground for 40+ years and develop their own structure on the leased land. Banks, nationwide dining establishments in outparcels, and large department stores are examples of renters that typically accept this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to handle your bespoke modeling job.

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to enable you to insert this model into your own property-level model to make it simpler to include a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a modification log for the design, along with discover crucial links related to the model.

The Ground Lease worksheet is separated into seven sections as laid out and explained below:

The Residential or commercial property Description section consists of 5 inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 enter whether the step of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is typical in genuine estate to append the name of the investment with (Ground Lease) to denote that the investment is for the charge easy interest in land with a ground lease.
Address - Address, city, state/province, zip/postal code, and country.
Land Size - Total SF or M2 of land. The variety of acres or hectares will than immediately be determined in cell E6.
Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (i.e. the leasehold). The land is assumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for example, you may be thinking about obtaining the arrive on which a Target Superstore is built. Target owns the structure and is renting the land for some extended amount of time. The total rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section includes four needed inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. This must also be the month and year of the first payment.
Next Ground Lease Payment - The month and year when the next ground lease payment is due.
Ground Lease Length (Years) - The length of the ground lease in years from ground lease start through ground lease maturity. This is the total length of the ground lease, not the number of years remaining. The maximum length is 100 years. Based on the ground lease length, the design then determines the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This typically amounts to the Next Ground Lease Payment date, although the design was constructed to enable analysis to begin prior to the Next Ground Lease Payment date.
Analysis End Date - An optional input, this is by default the Ground Lease End Date. In the occasion you're examining a shorter hold period, simply change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of the service terms of the ground lease, including payment quantity, frequency, and lease boosts. This area consists of 5 inputs plus the option to by hand model the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this amount might be for a yearly or regular monthly payment.
Lease Increase Method - The approach utilized to design lease boosts. This can either be: None - No rent boosts.
% Inc. - A portion boost over the previous lease quantity.
$ Inc. - A quantity boost over the previous rent quantity.
Custom - Manually design the rent payment amounts by year. If Custom is selected, the annual lease payment amounts in row 26 end up being inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you choose Custom and begin to change the annual lease payment amounts in row 26, there is no chance to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) section where you determine the reversion worth of the land (i.e. ground lease), the present worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is separated into 3 subsections, with five inputs and one optional input across the 3 subsections.

Ground Lease Reversion Value - Within this subsection you design the worth of the residential or commercial property as if there was no ground lease. Or to put it simply, a typical direct cap assessment of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings stemmed from renting the improvements, special of any ground lease payment.
Market Cap Rate - The cap rate for the residential or commercial property, as if no ground lease was consisted of. The idea being to come to a worth of the residential or commercial property before representing the ground lease.
Retenanting Costs (Nominal) - At the end of the ground lease term, the ground lessor will get back the land plus any improvements on the land. What will it cost (i.e. Retenanting) to retenant the residential or commercial property in today's expense (i.e. before inflation). Retenanting might include easy leasing expenses, it might consist of remodelling and leasing, or it may include taking down the structure and rebuilding something new. The idea is to get to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant.
Reversion Growth Rate (Each Year) - All of the above calculations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present value computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value calculation. It is computed by taking the residential or commercial property value web of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in case you wish to personalize the reversion value.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease capital. Think about this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section enables you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering purchasing a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The area includes simply one input.

Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It must include the acquisition cost, together with any other due diligence, closing, and pursuit costs connected to the financial investment.

After getting in the Ground Lease Investment Cost, the section calculates five return metrics:

- Unlevered Internal Rate of Return
- Unlevered Equity Multiple
- Net Profit
Average Rate of Return
- Average Free-and-Clear Return

Note that the resulting returns are extremely reliant on the analysis period, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section permits you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering buying a ground lease and intend to finance the purchase, it is within this area where you can get in the debt assumptions, and see the corresponding return from that levered financial investment. The area consists of three inputs.

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan quantity.
- Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model currently only permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or annually.

After going into the financial obligation presumptions for the ground lease financial investment, the section computes five return metrics:

- - Levered Internal Rate of Return
- Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return

As with the unlevered analysis, the resulting returns are extremely reliant on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will also greatly drive the levered return. And as a suggestion, for now the design only enables financial obligation with interest-only payments and a balloon at the end of the analysis period.

Section 6 - Ground Lease Returns (Levered)

The final area is where backend inputs utilized in the numerous information recognition lists are found. Unless you intend to customize the design, there is no reason to alter the worths in this area.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

In addition to the composed guidance above, I've created a short video that walks you through the different sections of the design. Note that this video is based upon v1.0 of the model.

Download the Ground Lease Valuation Model

To make this design available to everyone, it is used on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your assistance assists keep the content coming - typical realty appraisal models sell for $100 - $300+ per license). Just get in a cost together with an e-mail address to send out the download link to, and after that click 'Continue'. If you have any concerns about our "Pay What You're Able" program or why we provide our models on this basis, please reach out to either Mike or Spencer.

We regularly update the model (see version notes). Paid factors to the model get a brand-new download link through e-mail each time the design is upgraded.

Version Notes

Version 2.33

- Rewrote 'Flying Start Guide' with updates and for enhanced readability
- Updates to placeholder values
- Fix to misspelled word on Version tab

Version 2.32

- Removed redundant details in E17: G17.
- Updated I22 to reflect more accurate years of term remaining.
- Updates to placeholder worths

Version 2.31

- Further revisions to logic in I59

Version 2.3

- Fixed concern where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing the last cell

Version 2.2

- Revised formula in M26: DG26 to fix for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
- Updates to placeholder values

Version 2.1

- Updates to placeholder values.
- Added additional notes under 'Quick Start Guide' to clarify typical confusion around start dates for various sections.
- Misc. formatting updates

Version 2.0

- Moved 'Analysis Start', 'Analysis Period', and 'Analysis End' inputs above Ground Lease dates for improved user experience.
- Added a 'Flying Start Guide' to provide a tutorial for using the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' assumption to enable investor to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between assessment and financial investment returns.
- Renamed 'Analysis Start Date' to 'Valuation Start Date', 'Analysis Period' to 'Valuation Period', and 'Analysis End' to 'Valuation End'.
- Updated heading format to better separate between Valuations areas and Investment Returns areas.
- Adjusted return formulas to make vibrant to Investment Hold Period

Version 1.0

- Initial release

About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for commercial realty. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate across leading institutional companies.