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The topic of ground leases has actually turned up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the process of producing an Advanced Concepts Module for our genuine estate 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.

This design can be utilized standalone, or contributed to your design. In either case, it is helpful for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. improvements) relative to the charge simple interest (i.e. land).

Excel design 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 definitions 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, typically one celebration owns the land (i.e. fee easy interest) while a different celebration 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 duration of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge simple owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will typically own the improvements 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 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 places, where landowners do not always wish to offer but where they might not have the knowledge (or desire) to operate. Thus, they lease the land to somebody who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this rather typically with office complex in the downtown core of major cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, popular retail occupants prefer to construct and own their space but the developer does not always desire to offer the land. So, the retail occupant will concur to lease the ground for 40+ years and develop their own building on the leased land. Banks, national dining establishments in outparcels, and large outlet store are examples of tenants that often accept this structure.

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

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 place this design 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 likewise included where you can see a change log for the model, in addition to discover important links associated with the model.

The Ground Lease worksheet is separated into 7 areas as described and explained listed below:

The Residential or commercial property Description section consists of 5 inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 go into whether the step 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 add the name of the financial 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 variety of acres or hectares will than immediately be calculated in cell E6. Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for example, you might be considering obtaining the arrive on which a Target Superstore is constructed. Target owns the structure and is renting the land for some prolonged amount of time. The total rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description
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The Investment Timing area includes four needed 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 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 start 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 on the ground lease length, the design then determines the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to begin. This usually amounts to the Next Ground Lease Payment date, although the design was constructed 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 the occasion 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 business terms of the ground lease, consisting of payment quantity, frequency, and rent boosts. This section consists of five inputs plus the option to by hand design the rent payment amounts.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this quantity may be for an annual or monthly payment. Lease Increase Method - The method utilized to design rent increases. This can either be: None - No rent boosts. % Inc. - A percentage boost over the previous lease quantity. $ Inc. - An amount boost over the previous rent amount. Custom - Manually design the rent payment amounts by year. If Custom is picked, the yearly lease payment amounts in row 26 end up being inputs for you to manually alter (i.e. font turns blue). Important Note: If you select 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 value 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 3 subsections, with 5 inputs and one optional input throughout the three subsections.

Ground Lease Reversion Value - Within this subsection you model the worth of the residential or commercial property as if there was no ground lease. Or simply put, a common direct cap appraisal of a real estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings obtained 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 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 expense (i.e. before inflation). Retenanting may include easy leasing expenses, it might include renovation and leasing, or it might consist of tearing down the building and restoring something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present value calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth estimation. It is determined by taking the residential or commercial property value web of any retenanting expenses, and then growing it by a development rate. The value is an optional input in case you want to tailor the reversion worth.

Discount Rate - The discount rate at which to determine today worth of the ground lease money flows. Think of this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section permits you to determine 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 area where you can enter your acquisition/investment expense, and see the corresponding returns from that financial investment. The area includes 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 costs associated with the financial investment.

After getting in the Ground Lease Investment Cost, the area 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 dependent 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 purchasing a ground lease and intend to finance the purchase, it is within this section where you can go into the financial obligation assumptions, and see the matching return from that levered financial 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 determine the loan quantity.
• Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model 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 each year.
  
  After getting in the debt presumptions for the ground lease financial investment, the section computes 5 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 depending on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will also greatly drive the levered return. And as a tip, in the meantime the design just permits debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs utilized in the different data recognition lists are discovered. Unless you plan to modify the design, there is no factor to alter the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually created a brief video that strolls you through the various sections of the model. Note that this video is based upon v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this model available to everyone, it is provided 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 material coming - common realty valuation designs 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 frequently update the design (see version notes). Paid factors to the design get a brand-new download link via e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for enhanced readability
• Updates to placeholder worths
• 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 revisions 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 fix for issue 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 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 'Quick Start Guide' to supply a tutorial for utilizing the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to enable financier to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between evaluation 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 differentiate between Valuations areas and Investment Returns areas.
• Adjusted return formulas to make dynamic 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 actually financed over $30 billion in property across leading institutional companies.