The topic of ground leases has come up numerous times in the previous few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of creating an 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.
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This model can be used standalone, or added to your existing property-level design. In any case, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. enhancements) relative to the fee basic interest (i.e. land).

Excel design 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 meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor rents the land (i.e. ground) just. When it comes to a ground lease, generally one celebration owns the land (i.e. cost basic interest) while a different party owns the enhancements (i.e. leasehold interest). In most cases, the owner of the land leases the land to the owner of the improvements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the charge simple 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 utilize 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 use of the land. At the end of the ground lease term, the lessee must return use of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime places, where landowners don't necessarily wish to offer but where they may not have the know-how (or desire) to run. 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 frequently with office complex in the downtown core of major cities.

Another case where you'll face ground leases are in retail shopping mall. Oftentimes, prominent retail occupants choose to build and own their area however the developer does not necessarily desire to sell the land. So, the retail renter will accept rent the ground for 40+ years and develop their own building on the rented land. Banks, national restaurants in outparcels, and large outlet store are examples of renters that often consent to this structure.

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

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 insert this model into your own property-level model to make it easier to add a ground lease part to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the model, along with find crucial links connected to the design.

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

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

SF/M2 - In cell I3 go into 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 financial investment with (Ground Lease) to represent that the investment is for the fee 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 calculated 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 person or entity. So for example, you might be thinking about acquiring the land on which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged time period. The overall rentable location of the structure 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 relate to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. This ought to 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 overall 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 calculates the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to start. This usually amounts to the Next Ground Lease Payment date, although the design was built to enable 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, merely change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains business terms of the ground lease, including payment amount, frequency, and lease increases. This section consists of 5 inputs plus the alternative to by hand model the rent payment quantities.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this amount may be for an annual or month-to-month payment. Lease Increase Method - The method utilized to model lease increases. This can either be: None - No rent increases. % Inc. - A percentage increase over the previous rent amount. $ Inc. - A quantity boost over the previous lease amount. Custom - Manually model the rent payment quantities by year. If Custom is selected, the annual lease payment quantities in row 26 end up being inputs for you to manually alter (i.e. font style turns blue). Important Note: If you choose Custom and start to change the yearly 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) section where you determine the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is separated into three subsections, with five inputs and one optional input throughout 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 simply put, a normal direct cap evaluation of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income stemmed from renting the enhancements, special 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 get here 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 might include basic leasing costs, it might consist of remodelling and leasing, or it might consist of taking apart the building and restoring something brand-new. The idea is to reach a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Each Year) - All of the above estimations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth calculation. It is calculated by taking the residential or commercial property worth web of any retenanting expenses, and then growing it by a development rate. The value is an optional input in the occasion you wish to tailor the reversion value.

Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Think of 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 enables you to calculate 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 section where you can enter your acquisition/investment cost, and see the corresponding returns from that financial investment. The area consists of simply one input.

Ground Lease Investment Cost - This is the cost to obtain land with a ground lease. It ought to consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.

After going into 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 duration, 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 investment. If you are thinking about buying a ground lease and plan to finance the purchase, it is within this area where you can go into the debt presumptions, and see the corresponding return from that levered investment. The section 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 amount.
• 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 each year.
  
  After going into the financial obligation presumptions for the ground lease investment, the area determines five return metrics:
  
  - - Levered Internal Rate of Return
• Levered Equity Multiple
• Net Profit
• Average Rate of Return
• Average Cash-on-Cash Return
  
  As with the unlevered analysis, the resulting returns are highly based on the analysis duration, payment schedule, and reversion worth. The amount and rate of the financial obligation will also heavily drive the levered return. And as a reminder, for now the model only permits financial obligation 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 different information recognition lists are discovered. Unless you plan to modify the design, 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've put together 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 everyone, it is used on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or optimum (your support helps keep the content coming - normal realty appraisal designs cost $100 - $300+ per license). Just get in a cost 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 reach out to either Mike or Spencer.
  
  We frequently upgrade the model (see variation notes). Paid contributors to the model get a brand-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 improved 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 values
  
  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 the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to resolve for issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• 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 provide a tutorial for utilizing the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification 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 much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 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 realty. He has 20+ years of CRE experience and has actually financed over $30 billion in genuine estate across top institutional firms.