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The topic of ground leases has actually turned up several times in the previous couple of 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 producing 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 helpful for both wanting to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. enhancements) relative to the charge easy interest (i.e. land).

Excel model for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the principles 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 a real estate financier rents the land (i.e. ground) only. In the case of a ground lease, generally one celebration owns the land (i.e. charge simple interest) while a separate celebration owns the improvements (i.e. leasehold interest). For the most part, 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 realty, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the fee basic owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will normally own the enhancements on the land and use the land and improvements as if the lessee were the owner of the land. During the regard to 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 should return use of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime locations, where landowners don't necessarily desire to sell but where they may not have the proficiency (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 frequently 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, prominent retail renters prefer to build and own their area but the designer does not always wish to sell the land. So, the retail renter will agree to rent the ground for 40+ years and develop their own building on the leased land. Banks, national dining establishments in outparcels, and large outlet store are examples of renters that typically consent to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling task.

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 enable you to place this design into your own property-level model to make it simpler to include a ground lease part to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can view a change log for the model, in addition to find essential links related to the model.

The Ground Lease worksheet is broken up into 7 sections as laid out and discussed listed below:

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

SF/M2 - In cell I3 get in whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is common in property to add the name of the investment with (Ground Lease) to denote that the 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 variety of acres or hectares will than instantly be determined in cell E6. Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical enhancements (i.e. the leasehold). The land is assumed to be owned by one person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate person or entity. So for circumstances, you might be considering getting the arrive on which a Target Superstore is developed. Target owns the structure and is renting the land for some extended duration of time. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section includes 4 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 should likewise 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 variety of years staying. The maximum length is 100 years. Based upon the ground lease length, the model 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 amounts to the Next Ground Lease Payment date, although the design was constructed 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 the occasion you're examining a 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 includes business terms of the ground lease, including payment amount, frequency, and lease boosts. This section consists of 5 inputs plus the choice to by hand model the rent payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this quantity may be for a yearly or monthly payment. Lease Increase Method - The method utilized to design rent boosts. This can either be: None - No rent boosts. % Inc. - A percentage increase over the previous rent amount. $ Inc. - An amount increase over the previous rent amount. Custom - Manually design the rent payment amounts by year. If Custom is selected, the annual rent payment amounts 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 yearly rent payment amounts 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 calculate the reversion value 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 section is broken up into 3 subsections, with five inputs and one optional input across the 3 subsections.

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 common direct cap evaluation of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings obtained from renting 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 come to a value 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 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 may consist of simple leasing costs, it may consist of renovation and leasing, or it might include taking down the structure and rebuilding something new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above calculations are done before representing inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get here at a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value calculation. It is determined by taking the residential or commercial property value net of any retenanting costs, and then growing it by a development rate. The worth is an optional input in the occasion you wish to personalize the reversion worth.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease cash flows. Consider this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

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

Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It should include the acquisition expense, together with any other due diligence, closing, and pursuit expenses 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 extremely based on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area allows you to compute the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about purchasing a ground lease and intend to finance the purchase, it is within this section where you can go into the debt assumptions, and see the matching return from that levered investment. The area includes 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan quantity.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the design currently just allows for 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 debt presumptions 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
  
  Similar to the unlevered analysis, the resulting returns are extremely depending on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will likewise greatly drive the levered return. And as a suggestion, in the meantime the model just permits for debt 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 various data validation lists are found. Unless you mean to customize the design, 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've created a brief video that strolls you through the numerous 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 model accessible to everybody, it is used on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or optimum (your assistance helps keep the content coming - common property valuation designs 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 questions about our "Pay What You're Able" program or why we provide our designs on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the design (see variation notes). Paid contributors to the design receive a brand-new download link via email each time the model is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick Start Guide' with updates and for enhanced readability
• Updates to placeholder worths
• Fix to misspelled word on Version tab
  
  Version 2.32
  
  - Removed redundant information in E17: G17.
• Updated I22 to show more accurate years of term remaining.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to reasoning in I59
  
  Version 2.3
  
  - Fixed issue where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to solve for problem 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 areas.
• 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 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 enable financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in between evaluation 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 differentiate between Valuations sections and Investment Returns sections.
• Adjusted return formulas to make vibrant to Investment Hold Period
  
  Version 1.0
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  - 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 financed over $30 billion in genuine estate across leading institutional companies.