The topic of ground leases has shown up several 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 property 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.
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This model can be used standalone, or contributed to your existing property-level design. In any case, it is helpful for both to size a ground lease payment or leasehold owners seeking to understand the worth of the leasehold (i.e. improvements) relative to the cost easy interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the ideas 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 leases the land (i.e. ground) just. When it comes to a ground lease, typically one celebration owns the land (i.e. cost simple interest) while a separate party owns the improvements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest refers to a structure where a specific or entity (lessee) rents 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 usually own the enhancements 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 rent to the lessor for usage of the land. At the end of the ground lease term, the lessee needs to return use of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime places, where landowners do not necessarily desire to sell however where they may not have the know-how (or desire) to operate. Thus, they lease the land to somebody who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this frequently with office complex in the downtown core of significant cities.

Another case where you'll face ground leases are in retail shopping centers. Oftentimes, prominent retail occupants prefer to construct and own their area but the developer does not necessarily wish to sell the land. So, the retail occupant will concur to lease the ground for 40+ years and construct their own structure on the rented land. Banks, national dining establishments in outparcels, and large outlet store are examples of occupants that frequently consent to 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 consisted of on one worksheet. This is intentional to permit you to place this design into your own property-level model to make it easier to add a ground lease part to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a modification log for the design, along with discover crucial links associated with the design.

The Ground Lease worksheet is separated into 7 areas as laid out and discussed 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 enter whether the procedure 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 realty to add the name of the investment with (Ground Lease) to represent that the financial investment is for the fee basic interest in land with a ground lease. Address - Address, city, state/province, zip/postal code, and nation. Land Size - Total SF or M2 of land. The number 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 separate individual or entity. So for example, you may be considering obtaining the arrive at which a Target Superstore is built. Target owns the building and is renting the land for some extended time period. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of 4 required 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 commenced. This need to 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 beginning through ground lease maturity. This is the total length of the ground lease, not the number of years remaining. The optimum length is 100 years. Based upon the ground lease length, the model then determines 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 equivalent to the Next Ground Lease Payment date, although the design was constructed to permit 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 analyzing a shorter hold duration, simply change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes the organization terms of the ground lease, including payment quantity, frequency, and rent increases. This section includes 5 inputs plus the alternative to manually model the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see listed below), this quantity might be for an annual or month-to-month payment. Lease Increase Method - The technique utilized to model lease increases. This can either be: None - No lease boosts. % Inc. - A percentage increase over the previous lease quantity. $ Inc. - An amount increase over the previous rent quantity. Custom - Manually design the lease payment amounts by year. If Custom is chosen, the yearly lease payment quantities in row 26 end up being inputs for you to manually change (i.e. font style turns blue). Important Note: If you choose Custom and begin to alter the yearly rent payment amounts 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 calculate the reversion worth of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is broken up into three 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 simply put, a common direct cap evaluation of a property financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings derived from leasing the improvements, unique of any ground lease payment. Market Cap Rate - The cap rate for the residential or commercial property, as if no ground lease was included. The concept being to come to a value 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 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 might consist of easy leasing expenses, it may include renovation and leasing, or it might consist of taking down the building and reconstructing something new. The concept is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to arrive at 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 worth estimation. It is calculated by taking the residential or commercial property worth web of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in the occasion you wish to tailor the reversion value.

Discount Rate - The discount rate at which to determine the present value of the ground lease money flows. Think of this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section permits you to determine the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are thinking about buying a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the corresponding returns from that financial investment. The section consists of simply one input.

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

After entering the Ground Lease Investment Cost, the area 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 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 calculate the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about purchasing a ground lease and mean to finance the purchase, it is within this area where you can get in the debt presumptions, and see the matching return from that levered investment. The area includes three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan quantity.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the design currently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or yearly.
  
  After getting in the debt presumptions for the ground lease financial investment, the section determines 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 reliant on the analysis period, payment schedule, and reversion worth. The amount and rate of the debt will likewise heavily drive the levered return. And as a pointer, in the meantime the design only permits debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last section is where backend inputs utilized in the different information recognition lists are found. Unless you plan to customize the model, there is no factor to alter the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I've assembled a brief video that strolls you through the various sections of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everybody, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your support assists keep the content coming - typical property evaluation designs cost $100 - $300+ per license). Just get in a price together with an e-mail address to send out the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we provide our models on this basis, please connect to either Mike or Spencer.
  
  We frequently upgrade the model (see version notes). Paid contributors to the design get a new download link through e-mail each time the model 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 reasoning in I59
  
  Version 2.3
  
  - Fixed problem 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 issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added additional notes under 'Flying 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 enhanced user experience.
• Added a 'Quick Start Guide' to provide a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable for financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in between valuation 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 formatting to much better distinguish in between Valuations sections and Investment Returns sections.
• Adjusted return formulas 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 business property. He has 20+ years of CRE experience and has financed over $30 billion in real estate across leading institutional firms.