The subject of ground leases has actually turned up numerous times in the past couple of weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of producing 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 good time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or added to your existing property-level model. In either case, it is helpful for both landowners seeking to size a ground lease payment or leasehold owners looking to comprehend the value of the leasehold (i.e. enhancements) relative to the charge basic interest (i.e. land).
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Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the principles of 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) just. In the case of a ground lease, typically one party owns the land (i.e. fee simple interest) while a different 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 a prolonged duration of time (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest describes a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the charge simple owner (lessor) of the land for a prolonged period of time. The lessee of a leasehold estate will usually own the improvements 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 lease to the lessor for use of the land. At the end of the ground lease term, the lessee must return usage of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime places, where landowners do not always want to sell however where they might not have the proficiency (or desire) to operate. Thus, they lease the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this quite frequently with office complex in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, prominent retail occupants choose to construct and own their space but the developer does not always wish to sell the land. So, the retail occupant will concur to lease the ground for 40+ years and build their own building on the rented land. Banks, national restaurants in outparcels, and big outlet store are examples of renters that often concur to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing 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 deliberate to allow you to insert this model into your own property-level design to make it simpler to include a ground lease component to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the design, in addition to discover crucial links connected to the design.

The Ground Lease worksheet is broken up into 7 sections as described and discussed below:

The Residential or commercial property Description section includes five inputs related to the financial 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 prevails in real estate to add the name of the investment with (Ground Lease) to represent that the investment is for the charge basic 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 area in SF or M2 of the physical improvements (i.e. the leasehold). The land is assumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a different person or entity. So for example, you might be thinking about acquiring the arrive on which a Target Superstore is constructed. Target owns the building and is leasing the land for some extended duration of time. The total rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of 4 required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease started. This should 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 commencement 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 begin. This generally is equal to the Next Ground Lease Payment date, although the model was developed to permit 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 case you're evaluating a much shorter hold period, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains the organization regards to the ground lease, including payment quantity, frequency, and lease increases. This area consists of five inputs plus the option to manually design the lease payment quantities.

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see listed below), this quantity might be for a yearly or monthly payment. Lease Increase Method - The technique used to model lease boosts. This can either be: None - No lease increases. % Inc. - A percentage boost over the previous rent quantity. $ Inc. - A quantity increase over the previous lease amount. Custom - Manually design the lease payment quantities by year. If Custom is picked, the yearly rent payment quantities in row 26 end up being inputs for you to manually alter (i.e. font style turns blue). Important Note: If you select Custom and begin to alter the yearly rent 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) area where you calculate the reversion value of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into three subsections, with five inputs and one optional input throughout the three subsections.

Ground Lease Reversion Value - Within this subsection you model the value of the residential or commercial property as if there was no ground lease. Or to put it simply, a common direct cap assessment of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income 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 concept 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 might consist of easy leasing expenses, it may include remodelling and leasing, or it may include taking down the building and restoring something new. The idea is to show up at a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above computations are done before representing 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 worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth calculation. It is calculated by taking the residential or commercial property worth net of any retenanting costs, and then growing it by a development rate. The worth is an optional input in the occasion you want to customize the reversion worth.

Discount Rate - The discount rate at which to compute the present worth of the ground lease cash flows. Consider this discount rate as a difficulty 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 financial obligation) returns of a ground lease financial 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 corresponding returns from that investment. The section consists of just one input.

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

After entering the Ground Lease Investment Cost, the section 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 dependent on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering buying a ground lease and intend to fund the purchase, it is within this section where you can get in the financial obligation presumptions, 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 design will compute 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 regular monthly or each year.
  
  After going into the financial obligation assumptions for the ground lease financial investment, the section calculates 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 highly reliant on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a reminder, for now the model only permits debt with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final section is where backend inputs used in the various information validation lists are discovered. Unless you mean to modify the model, there is no factor to alter the values 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 created a brief video that strolls you through the numerous areas of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this design accessible to everyone, it is offered 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 - typical realty appraisal models cost $100 - $300+ per license). Just enter a price together with an email 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 designs on this basis, please reach out to either Mike or Spencer.
  
  We regularly update the design (see variation notes). Paid factors to the model receive a brand-new download link via email each time the model 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 information in E17: G17.
• Updated I22 to reflect more precise years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to logic 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 resolve for concern 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 worths.
• Added extra notes under 'Quick 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 provide 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 permit financier to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in between appraisal 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 much better differentiate in between Valuations areas and Investment Returns sections.
• Adjusted return solutions 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 property. He has 20+ years of CRE experience and has actually financed over $30 billion in property across leading institutional firms.
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