GitLab

The topic of ground leases has come up numerous times in the previous couple of weeks. Numerous A.CRE readers have emailed to ask 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 Model in Excel.

This design can be used standalone, or contributed to your existing property-level design. In any case, it is handy for both landowners seeking to size a ground lease payment or leasehold owners seeking to understand the value of the leasehold (i.e. improvements) relative to the fee basic interest (i.e. land).

Excel design for examining 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 leases the land (i.e. ground) only. When it comes to a ground lease, usually one celebration owns the land (i.e. fee simple interest) while a separate party owns the improvements (i.e. leasehold interest). In a lot of cases, the owner of the land leases the land to the owner of the improvements for a prolonged amount of time (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest refers to a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the cost easy owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will normally own the improvements on the land and use the land and enhancements as if the lessee were the owner of the land. During the regard to 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 should return usage of the land, and any enhancements thereon, to the land owner.

Ground leases are typical to prime places, where landowners do not always want to offer however where they may not have the knowledge (or desire) to operate. Thus, they lease the land to someone who owns and runs the enhancements on the land, and get a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of significant cities.

Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, popular retail tenants prefer to develop and own their space however the designer doesn't always want to sell the land. So, the retail tenant will concur to lease the ground for 40+ years and develop their own structure on the rented land. Banks, national restaurants in outparcels, and large outlet store are examples of occupants that often consent to this structure.

Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling project.

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 model into your own property-level design to make it simpler to add a ground lease part to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can see a change log for the design, as well as find essential links related to the design.

The Ground Lease worksheet is broken up into seven areas as outlined and explained below:

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

SF/M2 - In cell I3 go into 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 property to add the name of the financial investment with (Ground Lease) to signify that the financial investment is for the cost 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 instantly be determined in cell E6. Leasehold Net Rentable Area - Total net rentable location 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 instance, you might be considering acquiring the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some extended amount of time. The total rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of four 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 started. This should also 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 beginning through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The maximum 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 start. This usually is equal to the Next Ground Lease Payment date, although the design was built to enable analysis to start 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 event 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 contains the organization terms of the ground lease, consisting of payment amount, frequency, and rent increases. This section consists of 5 inputs plus the option to manually design the rent payment amounts.

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

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) area where you compute the reversion worth 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 three subsections.
bitcoinist.online
Ground Lease Reversion Value - Within this subsection you model the worth of the residential or commercial property as if there was no ground lease. Or to put it simply, a typical direct cap appraisal of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings obtained 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 idea being to reach 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 enhancements on the land. What will it cost (i.e. Retenanting) to retenant the residential or commercial property in today's cost (i.e. before inflation). Retenanting may include easy leasing costs, it might include remodelling and leasing, or it may consist of taking apart the building and rebuilding something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Annually) - All of the above estimations are done before accounting for inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value 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 worth internet of any retenanting costs, and then growing it by a growth rate. The worth is an optional input in case you want to personalize the reversion value.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease cash circulations. Think of 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 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 cost, and see the matching returns from that investment. The area includes simply one input.

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

After going into the Ground Lease Investment Cost, the area determines 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 highly depending on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to calculate the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and intend to finance the purchase, it is within this area where you can go into the debt presumptions, and see the matching 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 amount.
• Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model currently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
  
  After going into the debt assumptions for the ground lease financial investment, the section determines five return metrics:
  
  - - Levered Internal Rate of Return
• Levered Equity Multiple
• Net Profit
• Average Rate of Return
• Average Cash-on-Cash Return
  kkrspromoters.com
  As with the unlevered analysis, the resulting returns are extremely reliant on the analysis period, payment schedule, and reversion value. The amount and rate of the debt will likewise heavily drive the levered return. And as a tip, in the meantime the model just enables debt 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 various data recognition lists are found. Unless you plan to modify the model, there is no reason to alter the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually put together a brief video that walks you through the different areas of the model. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everyone, it is used on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or optimum (your assistance assists keep the material coming - normal realty appraisal models cost $100 - $300+ per license). Just go into a price together with an email address to send 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 connect to either Mike or Spencer.
  
  We frequently update the model (see variation notes). Paid factors to the model receive a new download link through e-mail each time the model is updated.
  
  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 show more accurate years of term staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() variety 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 issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder values.
• 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 'Quick Start Guide' to offer a tutorial for utilizing the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to enable investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between assessment 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 separate between Valuations areas and Investment Returns sections.
• 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 coworkers for industrial realty. He has 20+ years of CRE experience and has underwritten over $30 billion in genuine estate across leading institutional firms.