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The topic of ground leases has shown up a number of times in the previous couple of weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of producing an Advanced Concepts Module for our real estate 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 model. In any case, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. improvements) relative to the cost 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 rents the land (i.e. ground) only. When it comes to a ground lease, generally one party owns the land (i.e. cost easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). In many cases, 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 real estate, a leasehold interest describes a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will typically own the enhancements on the land and use the land and enhancements as if the lessee were the owner of the land. During the regard to 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 should return use of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime areas, where landowners don't always 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 runs the improvements on the land, and receive a ground lease payment in return. You see this frequently with office structures in the downtown core of significant cities.

Another case where you'll run into ground leases are in retail shopping centers. Oftentimes, popular retail tenants prefer to construct and own their space but the designer doesn't necessarily want to sell the land. So, the retail occupant will concur to lease the ground for 40+ years and develop their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big department stores are examples of renters that typically agree to 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 included on one worksheet. This is intentional to enable you to insert this model into your own property-level model 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 likewise included where you can view a change log for the design, as well as discover important links associated with the model.

The Ground Lease worksheet is broken up into seven areas as detailed and explained listed below:

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

SF/M2 - In cell I3 enter whether the measure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It prevails in property to append the name of the financial investment with (Ground Lease) to signify 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 variety of acres or hectares will than automatically 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 person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for circumstances, you may be thinking about getting the arrive at which a Target Superstore is built. Target owns the building and is leasing the land for some extended duration of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 4 required inputs and one optional inputs. These inputs belong to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. This must also 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 total 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 determines the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to start. This typically amounts to the Next Ground Lease Payment date, although the design 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 shorter hold duration, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

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

Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see below), this amount may be for an annual or regular monthly payment. Lease Increase Method - The method utilized to design rent boosts. This can either be: None - No rent boosts. % Inc. - A portion increase over the previous rent quantity. $ Inc. - An amount increase over the previous lease quantity. Custom - Manually design the lease payment quantities by year. If Custom is chosen, the yearly rent payment amounts in row 26 become inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you choose Custom and begin to change the annual 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 worth of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is separated into 3 subsections, with five inputs and one optional input throughout the 3 subsections.

Ground Lease Reversion Value - Within this subsection you design the worth of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap assessment of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from renting 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 consisted of. The idea being to reach a value 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 may consist of basic leasing expenses, it may consist of remodelling and leasing, or it may consist of tearing down the building and rebuilding something brand-new. The idea is to get here at a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Annually) - All of the above calculations are done before representing inflation (i.e. development). 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 worth in the ground lease present worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value estimation. It is determined by taking the residential or commercial property worth net of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in case you wish to tailor the reversion worth.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease capital. 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) area allows you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the corresponding returns from that investment. The section consists of simply one input.

Ground Lease Investment Cost - This is the cost to get land with a ground lease. It should consist of the acquisition expense, together with any other due diligence, closing, and pursuit expenses associated with the investment.

After getting in the Ground Lease Investment Cost, the area computes 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 depending on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section allows you to determine the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering acquiring a ground lease and mean to finance the purchase, it is within this section where you can enter the financial obligation presumptions, and see the corresponding return from that levered 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 calculate the loan quantity.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently just enables for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or every year.
  
  After going into the financial obligation presumptions for the ground lease financial investment, the area calculates 5 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 reliant on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will also heavily drive the levered return. And as a tip, in the meantime the design just enables 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 different data validation lists are discovered. Unless you plan to modify the design, there is no reason to change 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 have actually created a short 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 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 assists keep the material coming - typical property appraisal designs offer for $100 - $300+ per license). Just enter a rate together with an email address to send the download link to, and then 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 model (see version notes). Paid factors to the design get a brand-new download link through e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick 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 reflect more precise years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to reasoning 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 problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra 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 enhanced user experience.
• Added a 'Quick Start Guide' to supply a tutorial for utilizing the model.
• 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 allow for investor to analyze 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 better distinguish in between Valuations areas 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 coworkers for business genuine estate. He has 20+ years of CRE experience and has underwritten over $30 billion in property across top institutional companies.