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The topic of ground leases has shown up numerous times in the past few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the process of developing 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 great time to share my Ground Lease Valuation Model in Excel.
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This design can be utilized standalone, or added to your existing property-level design. Either method, it is handy for both landowners seeking to size a ground lease payment or leasehold owners looking to understand the value of the leasehold (i.e. enhancements) relative to the cost easy interest (i.e. land).

Excel design for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the principles of Ground Lease and Leasehold Interest, you to the meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where a genuine estate financier rents the land (i.e. ground) only. When it comes to a ground lease, generally one party owns the land (i.e. charge basic interest) while a different party owns the improvements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the improvements for a prolonged period of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will usually 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 usage of the land. At the end of the ground lease term, the lessee must return use of the land, and any enhancements thereon, to the land owner.

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

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, popular retail tenants prefer to build and own their area but the developer does not always desire to sell the land. So, the retail occupant will agree to lease the ground for 40+ years and construct their own structure on the leased land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of renters that often concur to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing 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 intentional to permit you to insert this model into your own property-level design to make it simpler 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 included where you can see a change log for the model, along with find important links associated with the model.

The Ground Lease worksheet is separated into 7 sections as described and discussed listed below:

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

SF/M2 - In cell I3 get in whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is common in property to append the name of the financial investment with (Ground Lease) to denote that the financial investment is for the charge simple 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 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. improvements) to be owned by a separate individual or entity. So for example, 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 amount of time. The overall rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of four required inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. This need to 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 beginning 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 on the ground lease length, the design then computes the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to start. This generally is equivalent 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 much shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area consists of business terms of the ground lease, consisting of payment quantity, frequency, and rent boosts. This area consists of five inputs plus the option to manually design the lease payment quantities.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this amount might be for an annual or month-to-month payment. Lease Increase Method - The technique used to model lease increases. This can either be: None - No rent boosts. % Inc. - A portion boost over the previous lease quantity. $ Inc. - A quantity boost over the previous lease amount. Custom - Manually design the lease payment quantities by year. If Custom is chosen, the annual rent payment quantities in row 26 become inputs for you to manually alter (i.e. font style turns blue). Important Note: If you choose Custom and start 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) section where you calculate the reversion worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is broken up into three subsections, with five inputs and one optional input throughout the three 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 simply put, a common direct cap appraisal of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings 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 included. The concept being to reach 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 may consist of easy leasing costs, it might include renovation and leasing, or it may consist of taking apart the building and rebuilding something brand-new. The idea is to arrive at a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. growth). 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 estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth computation. It is computed by taking the residential or commercial property worth internet of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in the event you want to personalize the reversion worth.

Discount Rate - The discount rate at which to compute today value of the ground lease cash circulations. 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 compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering 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 expense to obtain land with a ground lease. It should consist of the acquisition expense, together with any other due diligence, closing, and pursuit costs related to the financial investment.

After entering 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 based on the analysis duration, payment schedule, and reversion value.
  
  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 investment. If you are considering buying a ground lease and plan to finance the purchase, it is within this section where you can get in the debt 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 design currently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or annually.
  
  After entering the financial obligation presumptions for the ground lease financial investment, the area calculates five return metrics:
  
  - - Levered Internal Rate of Return
• Levered Equity Multiple
• Net Profit
• Average Rate of Return
• Average Cash-on-Cash Return
  
  Just like the unlevered analysis, the resulting returns are highly reliant on the analysis duration, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise greatly drive the levered return. And as a pointer, in the meantime the design only allows for financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs utilized in the different data validation lists are found. Unless you plan to customize 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 guidance above, I've assembled a brief video that walks you through the numerous areas of the model. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design available to everyone, it is offered on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your assistance assists keep the content coming - common genuine estate appraisal models cost $100 - $300+ per license). Just go into a cost together with an e-mail 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 designs 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 new download link by means of 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 information in E17: G17.
• Updated I22 to show more precise years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to logic 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 solve for problem 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 worths.
• Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for different 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 'Quick Start Guide' to provide a tutorial for utilizing 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' 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 evaluation 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 format to better differentiate between Valuations areas and Investment Returns areas.
• Adjusted return solutions 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 commercial realty. He has 20+ years of CRE experience and has actually underwritten over $30 billion in realty across leading institutional companies.
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