The subject of ground leases has actually come up numerous times in the past couple of weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of creating an Module for our property monetary 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.
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This model can be used standalone, or included to your existing property-level design. In any case, it is useful for both landowners seeking to size a ground lease payment or leasehold owners seeking to understand the worth of the leasehold (i.e. improvements) relative to the charge easy interest (i.e. land).

Excel model 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 party owns the land (i.e. fee simple interest) while a different celebration owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the improvements for a prolonged time period (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 cost 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 utilize 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 needs to return usage of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners don't always wish to offer but where they might not have the competence (or desire) to run. Thus, they rent the land to someone who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of major cities.

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, prominent retail tenants prefer to build and own their space however the designer doesn't necessarily wish to offer the land. So, the retail occupant will consent to lease the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and large department shops are examples of tenants that often agree to this structure.

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

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 enable you to insert this design into your own property-level design to make it easier to include a ground lease component to your analysis.

All analysis is carried out 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 important links related to the model.

The Ground Lease worksheet is separated into seven sections as described and discussed below:

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

SF/M2 - In cell I3 get in whether the measure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in genuine estate to append the name of the financial investment with (Ground Lease) to signify that the financial investment is for the cost simple interest in land with a ground lease. Address - Address, city, state/province, zip/postal code, and nation. Land Size - Total SF or M2 of land. The variety 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 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 separate person or entity. So for example, you might be thinking about getting the land on which a Target Superstore is built. Target owns the building and is renting the land for some extended period 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 relate to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease began. 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 beginning through ground lease maturity. This is the total length of the ground lease, not the number of years staying. The optimum 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 is equivalent to the Next Ground Lease Payment date, although the design was developed 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 examining a shorter hold period, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes the business regards to the ground lease, including payment quantity, frequency, and lease increases. This section includes five inputs plus the choice to manually design the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see listed below), this quantity might be for an annual or monthly payment. Lease Increase Method - The method used to design rent boosts. This can either be: None - No rent boosts. % Inc. - A portion boost over the previous lease quantity. $ Inc. - An amount increase over the previous lease amount. Custom - Manually design the lease payment amounts by year. If Custom is selected, the yearly rent payment quantities in row 26 become inputs for you to manually change (i.e. font style turns blue). Important Note: If you pick Custom and start to alter the annual lease payment quantities in row 26, there is no method to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) area where you compute the reversion worth of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into three subsections, with 5 inputs and one optional input across 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 in other words, a normal direct cap valuation of a real estate financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income stemmed 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 consisted of. The concept being to get here at 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 expense (i.e. before inflation). Retenanting may consist of basic leasing expenses, it might include renovation and leasing, or it may consist of taking apart the building and rebuilding something new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - 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 reach a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth computation. It is determined by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in the event you wish to tailor the reversion value.

Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Consider this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area permits you to compute the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that financial investment. The section includes just one input.

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

After getting in the Ground Lease Investment Cost, the section 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 reliant on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about buying a ground lease and plan to fund the purchase, it is within this section where you can get in the debt presumptions, 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 determine the loan quantity.
• Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently only 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 going into the financial obligation presumptions for the ground lease financial investment, the section 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 dependent on the analysis period, payment schedule, and reversion worth. The quantity and rate of the debt will likewise heavily drive the levered return. And as a suggestion, for now the model just enables debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the different data recognition lists are found. Unless you mean to customize 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 guidance above, I've created a brief video that walks 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 design accessible to everybody, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or optimum (your support assists keep the material coming - normal property valuation models sell for $100 - $300+ per license). Just go into a price together with an email address to send out 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 reach out to either Mike or Spencer.
  
  We routinely upgrade the model (see variation notes). Paid factors to the design get a brand-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 show more accurate years of term staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  
  - Fixed concern 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 solve 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 values.
• Added extra notes under 'Flying start Guide' to clarify common 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 supply 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' assumption to permit investor 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 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 separate between Valuations areas and Investment Returns areas.
• Adjusted return solutions to make vibrant to Investment Hold Period
  
  Version 1.0
  knightsbridge.net
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for business realty. He has 20+ years of CRE experience and has underwritten over $30 billion in genuine estate throughout leading institutional companies.