The subject of ground leases has shown up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of developing an Advanced Concepts Module for our realty financial 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 model. In either case, it is useful for both landowners wanting to size a ground lease payment or leasehold owners seeking to understand the worth of the leasehold (i.e. enhancements) relative to the charge easy interest (i.e. land).

Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

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

Ground lease - "A lease structure where an investor rents the land (i.e. ground) only. In the case of a ground lease, generally one celebration owns the land (i.e. fee easy interest) while a separate party owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the enhancements for an extended duration of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest describes a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge basic owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will generally own the improvements on the land and utilize 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 lease to the lessor for usage 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 prevail to prime areas, where landowners do not necessarily desire to offer however where they might not have the know-how (or desire) to operate. Thus, they rent the land to somebody who owns and operates the improvements on the land, and get a ground lease payment in return. You see this on a regular basis with workplace structures in the downtown core of major cities.

Another case where you'll run into ground leases are in retail shopping mall. Oftentimes, prominent retail occupants prefer to build and own their area however the designer doesn't necessarily desire to offer the land. So, the retail tenant will consent to rent the ground for 40+ years and construct their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of tenants that often accept this structure.

Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling project.

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to enable you to place this design into your own property-level model to make it much easier to include a ground lease element to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a change log for the design, as well as discover important links related to the design.

The Ground Lease worksheet is broken up into seven sections as laid out and described listed below:

The Residential or commercial property Description section includes five inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 get in 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 common in property to append the name of the financial investment with (Ground Lease) to represent that the financial 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 computed in cell E6.
Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different person or entity. So for example, you might be considering acquiring the arrive at which a Target Superstore is constructed. Target owns the structure and is renting the land for some extended amount of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of four needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease began. This must likewise be the month and year of the very 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 variety of years remaining. The optimum length is 100 years. Based upon the ground lease length, the design then calculates the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This usually is equal to the Next Ground Lease Payment date, although the design was built to allow for 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 case you're analyzing a much shorter hold period, simply alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

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

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see below), this quantity may be for an annual or month-to-month payment.
Lease Increase Method - The approach used to design rent boosts. This can either be: None - No lease increases.
% Inc. - A portion boost over the previous rent amount.
$ Inc. - An amount boost over the previous rent quantity.
Custom - Manually design the rent payment quantities by year. If Custom is selected, the yearly rent payment amounts in row 26 end up being inputs for you to manually alter (i.e. font turns blue). Important Note: If you choose Custom and begin to alter the annual lease payment quantities in row 26, there is no way to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) section where you compute the reversion value of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is separated into 3 subsections, with 5 inputs and one optional input across the 3 subsections.

Ground Lease Reversion Value - Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap evaluation of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived from leasing the enhancements, exclusive 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 concept being to show up at a worth of the residential or commercial property before accounting for the ground lease.
Retenanting Costs (Nominal) - At the end of the ground lease term, the ground lessor will return the land plus any enhancements 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 may consist of easy leasing expenses, it might consist of renovation and leasing, or it might include taking apart the building and reconstructing something brand-new. The concept is to come 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. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present worth calculation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value estimation. It is computed by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in the event you wish to tailor the reversion worth.

Discount Rate - The discount rate at which to determine today value of the ground lease cash flows. 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 permits you to calculate the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about purchasing a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the matching returns from that financial investment. The section includes simply one input.

Ground Lease Investment Cost - This is the expense to get land with a ground lease. It ought to consist of the acquisition expense, together with any other due diligence, closing, and pursuit costs related to the investment.

After getting in the Ground Lease Investment Cost, the area computes 5 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 dependent on the analysis period, payment schedule, and reversion worth.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) area enables you to determine the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about buying a ground lease and mean to fund the purchase, it is within this area where you can get in the financial obligation presumptions, and see the corresponding return from that levered investment. The area consists of 3 inputs.

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan quantity.
- Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the design presently just enables for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or every year.

After going into the debt presumptions for the ground lease financial investment, the section computes 5 return metrics:

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

Similar to the unlevered analysis, the resulting returns are extremely based on the analysis duration, payment schedule, and reversion worth. The quantity and rate of the debt will likewise greatly drive the levered return. And as a pointer, in the meantime the model just enables financial obligation with interest-only payments and a balloon at the end of the analysis duration.

Section 6 - Ground Lease Returns (Levered)

The final section is where backend inputs utilized in the numerous information validation lists are discovered. Unless you intend to customize the model, there is no reason to change the values in this section.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

In addition to the composed assistance above, I have actually created a short video that walks you through the numerous areas of the design. Note that this video is based on v1.0 of the design.

Download the Ground Lease Valuation Model

To make this model available to everybody, it is used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance helps keep the content coming - normal property valuation designs cost $100 - $300+ per license). Just enter a cost together with an e-mail address to send out the download link to, and after that click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our designs on this basis, please reach out to either Mike or Spencer.

We frequently upgrade the design (see version notes). Paid factors to the design get a brand-new download link through email each time the design is upgraded.

Version Notes

Version 2.33

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

Version 2.32

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

Version 2.31

- Further revisions to reasoning in I59

Version 2.3

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

Version 2.2

- Revised formula in M26: DG26 to solve for concern 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 worths.
- Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for different areas.
- Misc. formatting updates

Version 2.0

- Moved 'Analysis Start', 'Analysis Period', and 'Analysis End' inputs above Ground Lease dates for enhanced user experience.
- Added a 'Flying Start Guide' to supply a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to permit for financier to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between evaluation and investment returns.
- Renamed 'Analysis Start Date' to 'Valuation Start Date', 'Analysis Period' to 'Valuation Period', and 'Analysis End' to 'Valuation End'.
- Updated heading formatting to better distinguish between Valuations areas and Investment Returns sections.
- Adjusted return solutions to make dynamic 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 coworkers for industrial property. He has 20+ years of CRE experience and has financed over $30 billion in property across leading institutional firms.