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The subject of ground leases has come up several times in the previous couple of weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our property financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or contributed to your existing property-level design. In either case, it is useful for both landowners looking to size a ground lease payment or leasehold owners aiming to the worth of the leasehold (i.e. enhancements) relative to the charge simple interest (i.e. land).

Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the ideas 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 a genuine estate investor rents the land (i.e. ground) just. When it comes to a ground lease, usually one party owns the land (i.e. cost simple interest) while a different celebration owns the enhancements (i.e. leasehold interest). In the majority of cases, the owner of the land rents the land to the owner of the enhancements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the cost easy owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will usually own the improvements on the land and utilize 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 rent 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 enhancements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners don't necessarily wish to offer however where they may not have the competence (or desire) to run. Thus, they lease the land to somebody who owns and runs the enhancements on the land, and get a ground lease payment in return. You see this quite frequently with workplace buildings in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, popular retail renters choose to construct and own their area however the developer doesn't necessarily wish to sell the land. So, the retail tenant will accept rent the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and large outlet store are examples of occupants that frequently consent to this structure.

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

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are included on one worksheet. This is intentional to permit you to insert this design into your own property-level model to make it easier 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 modification log for the design, as well as discover important links associated with the model.

The Ground Lease worksheet is separated into seven areas as laid out and described listed below:

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

SF/M2 - In cell I3 go into whether the step 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 realty to append the name of the investment with (Ground Lease) to denote that the financial 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 immediately be computed 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 presumed 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 instance, you might be considering acquiring the land on which a Target Superstore is constructed. Target owns the structure 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 includes 4 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 need to 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 start through ground lease maturity. This is the total length of the ground lease, not the variety of years remaining. The optimum length is 100 years. Based on the ground lease length, the design 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 generally amounts to the Next Ground Lease Payment date, although the model was built to allow for 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 analyzing a much shorter hold duration, simply alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area consists of the service terms of the ground lease, consisting of payment amount, frequency, and lease increases. This section includes 5 inputs plus the alternative to manually design the rent payment quantities.

Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see listed below), this amount might be for an annual or regular monthly payment. Lease Increase Method - The method used to model rent boosts. This can either be: None - No lease increases. % Inc. - A portion boost over the previous lease amount. $ Inc. - An amount boost over the previous rent quantity. Custom - Manually model the rent payment quantities by year. If Custom is picked, the annual lease payment amounts in row 26 end up being inputs for you to by hand change (i.e. font style turns blue). Important Note: If you select Custom and start to alter 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 compute the reversion value of the land (i.e. ground lease), the present worth 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 design the value of the residential or commercial property as if there was no ground lease. Or to put it simply, a common direct cap valuation of a real estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income 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 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 get back 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 include basic leasing expenses, it might consist of renovation and leasing, or it might consist of taking apart the building and rebuilding 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 computations are done before representing inflation (i.e. growth). 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 worth in the ground lease present worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth computation. It is calculated by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a development rate. The worth is an optional input in the event you wish to tailor the reversion value.

Discount Rate - The discount rate at which to determine today worth of the ground lease money circulations. Think of this discount rate as an obstacle 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 compute the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering buying a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the corresponding returns from that investment. The area includes simply one input.

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

After going into 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 reliant on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section allows you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and plan to finance the purchase, it is within this section where you can enter the financial obligation assumptions, and see the matching return from that levered financial investment. The area includes 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 presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or annually.
  
  After getting in the financial obligation assumptions for the ground lease investment, the section computes 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 depending on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will likewise greatly drive the levered return. And as a pointer, in the meantime the design just permits financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last section is where backend inputs used in the various data recognition lists are found. Unless you plan to modify the model, there is no factor to change the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I've created a short video that strolls you through the various areas 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 everyone, it is used on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your assistance helps keep the material coming - normal realty evaluation models cost $100 - $300+ per license). Just get in a cost 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 models on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the design (see version notes). Paid contributors to the design get a new download link via email each time the design 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 reflect more accurate years of term remaining.
• Updates to placeholder values
  
  Version 2.31
  
  - Further revisions to logic 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 concern 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 worths.
• Added extra notes under 'Quick Start Guide' to clarify typical confusion around start dates for various sections.
• 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 'Flying Start Guide' to supply a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to enable for financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between valuation 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 distinguish in between Valuations sections 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 colleagues for industrial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate across leading institutional companies.