The subject of ground leases has actually shown up several times in the past couple of 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 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 model can be used standalone, or contributed to your existing property-level model. Either method, it is practical for both landowners wanting to size a ground lease payment or leasehold owners looking to comprehend the worth of the (i.e. improvements) relative to the cost easy interest (i.e. land).
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Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the concepts 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 leases the land (i.e. ground) only. When it comes to a ground lease, usually one celebration owns the land (i.e. charge easy 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 a prolonged time period (20 - 100 years)."
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Leasehold Interest - "In real estate, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the cost basic 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 utilize the land and enhancements 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 should return use of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime locations, where landowners don't always desire to offer but where they might not have the proficiency (or desire) to operate. Thus, they lease the land to someone who owns and runs the improvements on the land, and receive a ground lease payment in return. You see this on a regular basis with workplace structures in the downtown core of major cities.

Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, popular retail tenants prefer to develop and own their area however the developer doesn't necessarily desire to sell the land. So, the retail occupant will accept lease the ground for 40+ years and build their own building on the leased land. Banks, nationwide dining establishments in outparcels, and big outlet store are examples of tenants that frequently consent to this structure.

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

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to permit you to insert this design into your own property-level model to make it much easier to add a ground lease component to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a change log for the model, as well as find essential links associated with the model.

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

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

SF/M2 - In cell I3 go into whether the procedure of size remains 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 financial investment with (Ground Lease) to represent that the investment is for the fee 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 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 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 at which a Target Superstore is developed. Target owns the structure 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 section consists of 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 began. This ought to 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 beginning through ground lease maturity. This is the total length of the ground lease, not the variety of years remaining. The maximum 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 begin. This normally amounts to the Next Ground Lease Payment date, although the design was developed 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 the event you're analyzing a much shorter hold period, 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 regards to the ground lease, consisting of payment quantity, frequency, and lease increases. This area consists of five inputs plus the choice to by hand model the lease payment quantities.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see below), this quantity may be for a yearly or monthly payment. Lease Increase Method - The technique used to model lease boosts. This can either be: None - No lease boosts. % Inc. - A portion increase over the previous rent quantity. $ Inc. - A quantity increase over the previous rent amount. Custom - Manually model the rent payment amounts by year. If Custom is picked, the annual lease payment amounts in row 26 become inputs for you to by hand change (i.e. font turns blue). Important Note: If you choose Custom and begin to change the annual rent payment quantities 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), the present worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into 3 subsections, with five inputs and one optional input throughout the three 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 typical direct cap assessment of a property financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income originated 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 included. 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 return 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 might include basic leasing costs, it may consist of restoration and leasing, or it may consist of taking apart the structure and restoring something brand-new. The idea is to reach a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Per Year) - All of the above computations are done before accounting for inflation (i.e. development). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to arrive at a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth computation. It is computed by taking the residential or commercial property value net of any retenanting costs, and after that growing it by a growth rate. The value is an optional input in case you want to personalize the reversion worth.

Discount Rate - The discount rate at which to calculate the present value of the ground lease cash 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) area allows you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial 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 financial investment. The area includes simply one input.

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

After entering 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 based on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area permits you to determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to fund the purchase, it is within this section where you can get in the financial obligation presumptions, and see the matching return from that levered financial investment. The area includes 3 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 Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design currently just enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or every year.
  
  After getting in the financial obligation presumptions for the ground lease investment, the area determines 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 highly dependent on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will also heavily drive the levered return. And as a tip, for now the model only enables financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the various data recognition lists are discovered. Unless you intend to customize the design, 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 written guidance above, I have actually assembled a short video that strolls you through the numerous sections of the design. Note that this video is based upon 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 (enter $0 if you 'd like) or optimum (your support helps keep the content coming - typical property evaluation designs cost $100 - $300+ per license). Just get in a rate together with an email address to send the download link to, and then 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 regularly update the design (see version notes). Paid factors to the design get a 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 enhanced 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 accurate years of term staying.
• Updates to placeholder worths
  
  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 issue 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 additional notes under 'Quick Start Guide' to clarify typical 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 functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to enable investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 format to better differentiate 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 business realty. He has 20+ years of CRE experience and has financed over $30 billion in property across leading institutional firms.