The subject of ground leases has turned up a number of times in the previous couple of weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the procedure of creating an Advanced Concepts Module for our real estate 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 valuable for both landowners looking to size a ground lease payment or leasehold owners seeking to comprehend the value of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).

Excel model for examining 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 leases the land (i.e. ground) just. In the case of a ground lease, generally one party owns the land (i.e. cost basic interest) while a separate celebration owns the improvements (i.e. leasehold interest). In the majority of cases, the owner of the land leases the land to the owner of the enhancements for an extended time period (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will usually own the improvements on the land and use the land and improvements 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 needs to return usage of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime places, where landowners do not always want to sell but where they may not have the proficiency (or desire) to operate. Thus, they rent the land to somebody who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this on a regular basis with office structures in the downtown core of significant cities.

Another case where you'll face ground leases are in retail shopping mall. Oftentimes, prominent retail tenants prefer to build and own their space but the developer doesn't necessarily wish to sell the land. So, the retail tenant will consent to rent the ground for 40+ years and build their own building on the rented land. Banks, nationwide restaurants in outparcels, and big department stores are examples of tenants that frequently accept this structure.

Quick Note: Not interested in DIY analysis? Consider dealing 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 consisted of on one worksheet. This is deliberate to permit you to place this design into your own property-level model to make it easier to include 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 modification log for the design, along with find crucial links connected to the design.

The Ground Lease worksheet is broken up into seven sections as laid out and described below:

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

SF/M2 - In cell I3 enter whether the measure of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is typical in property to append the name of the financial investment with (Ground Lease) to denote that the investment is for the charge 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 number of acres or hectares will than instantly be computed in cell E6.
Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (i.e. the leasehold). The land is assumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different person or entity. So for example, you may be considering acquiring the arrive on which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged amount 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 financial investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This must 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 start through ground lease maturity. This is the overall length of the ground lease, not the number 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 typically is equivalent to the Next Ground Lease Payment date, although the model was constructed 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 the occasion you're examining a shorter hold period, merely change the orange font cell I17 to the favored 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 boosts. This section consists of five inputs plus the option to by hand model the rent payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see listed below), this amount might be for a yearly or month-to-month payment.
Lease Increase Method - The technique used to model rent increases. This can either be: None - No rent increases.
% Inc. - A portion increase over the previous rent quantity.
$ Inc. - An amount increase over the previous rent quantity.
Custom - Manually design the rent payment amounts by year. If Custom is selected, the yearly lease payment amounts in row 26 become inputs for you to by hand change (i.e. font turns blue). Important Note: If you choose Custom and begin to alter the annual lease payment quantities 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 compute 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 3 subsections, with 5 inputs and one optional input throughout the 3 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 typical direct cap evaluation of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings stemmed from leasing the enhancements, 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 get to 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 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 simple leasing expenses, it might consist of remodelling and leasing, or it may include taking apart the building and rebuilding something brand-new. The idea is to get to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant.
Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. development). Enter a development 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 calculation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth calculation. It is calculated by taking the residential or commercial property value web of any retenanting costs, and after that growing it by a growth rate. The value is an optional input in case you want to personalize the reversion worth.

Discount Rate - The discount rate at which to compute today 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 investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area allows you to calculate the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about acquiring 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 section consists of simply one input.

Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It should consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses associated with the 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 highly based on the analysis period, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section permits you to calculate the levered (i.e. with debt) returns of a ground lease investment. If you are considering purchasing a ground lease and mean to finance the purchase, it is within this section where you can go into the financial obligation 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 design will determine the loan amount.
- Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently just permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or annually.

After entering the debt presumptions 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

As with the unlevered analysis, the resulting returns are extremely based on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a pointer, for now the model only allows for 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 data validation lists are found. Unless you intend 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 short video that strolls you through the different 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 available to everybody, it is provided on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your assistance assists keep the material coming - typical realty valuation designs offer for $100 - $300+ per license). Just enter a cost 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 connect to either Mike or Spencer.

We regularly update the model (see variation notes). Paid factors to the model get a brand-new download link via e-mail each time the design is upgraded.

Version Notes

Version 2.33

- Rewrote 'Flying Start Guide' with updates and for improved 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 precise years of term remaining.
- Updates to placeholder worths

Version 2.31

- Further modifications to logic 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 resolve for problem 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 '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 explanation functions.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable for 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 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 differentiate between Valuations areas and Investment Returns areas.
- 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 commercial realty. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate throughout top institutional companies.