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The subject of ground leases has shown up a number of times in the past few weeks. Numerous A.CRE readers have actually emailed to ask 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 thought now would be a good time to share my Ground Lease Valuation Model in Excel.
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This model can be utilized standalone, or contributed to your existing property-level design. In any case, it is handy for both landowners looking to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. improvements) relative to the charge simple 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 concepts of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our of CRE Terms:

Ground lease - "A lease structure where an investor rents the land (i.e. ground) only. In the case of a ground lease, usually one celebration owns the land (i.e. charge basic interest) while a separate celebration owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the enhancements for an extended time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the cost simple owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will generally own the enhancements on the land and use 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 usage of the land. At the end of the ground lease term, the lessee must return usage of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime places, where landowners do not necessarily want to sell however where they may not have the expertise (or desire) to run. 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 quite typically with workplace buildings in the downtown core of significant cities.

Another case where you'll run into ground leases remain in retail shopping centers. Oftentimes, popular retail occupants prefer to construct and own their space however the developer does not always wish to offer the land. So, the retail tenant will accept rent the ground for 40+ years and develop their own building on the leased land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of renters that frequently accept this structure.

Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling project.

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to enable you to insert this model into your own property-level design to make it simpler to include a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a change log for the design, in addition to discover essential links connected to the design.

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

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

SF/M2 - In cell I3 get in whether the measure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the 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 cost basic 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 instantly 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. improvements) to be owned by a different individual or entity. So for circumstances, you might be considering acquiring the arrive 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 structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section includes 4 needed 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 should 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 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 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 usually is equal to the Next Ground Lease Payment date, although the model was constructed to enable 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 examining a shorter hold duration, simply change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes the business regards to the ground lease, consisting of payment amount, frequency, and rent boosts. This area includes five inputs plus the alternative 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 amount might be for a yearly or month-to-month payment. Lease Increase Method - The approach utilized to design rent increases. This can either be: None - No rent increases. % Inc. - A percentage boost over the previous rent amount. $ Inc. - An amount boost over the previous rent amount. Custom - Manually model the lease payment amounts by year. If Custom is picked, the annual rent payment quantities in row 26 end up being inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you choose Custom and begin to change the annual rent payment quantities in row 26, there is no other way to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) section where you compute the reversion worth 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 section is broken up 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 to put it simply, a normal direct cap appraisal of a real estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from renting the improvements, exclusive 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 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 improvements 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 consist of basic leasing costs, it may consist of renovation and leasing, or it might consist of taking down the structure and rebuilding something brand-new. The idea is to reach a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Each Year) - All of the above estimations are done before accounting for inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value calculation. It is calculated by taking the residential or commercial property worth internet of any retenanting costs, and then growing it by a development rate. The value is an optional input in the event you wish to personalize the reversion worth.

Discount Rate - The discount rate at which to compute today worth of the ground lease money flows. Think about 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) section allows you to determine the unlevered (i.e. before debt) 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 cost, and see the corresponding returns from that investment. The area includes simply one input.

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

After going into the Ground Lease Investment Cost, the section computes 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 highly reliant on the analysis period, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about acquiring a ground lease and mean to fund the purchase, it is within this area where you can go into the financial obligation assumptions, and see the matching return from that levered financial investment. The section consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will compute the loan amount.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently only permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or yearly.
  
  After going into the debt 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
  
  Just like the unlevered analysis, the resulting returns are highly reliant on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will also greatly drive the levered return. And as a suggestion, in the meantime the design only permits debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last section is where backend inputs used in the various data recognition lists are found. Unless you mean to customize the model, there is no reason to alter the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I have actually assembled a short video that strolls you through the numerous 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 everybody, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your support helps keep the content coming - typical realty appraisal models cost $100 - $300+ per license). Just go into a cost together with an email address to send the download link to, and after that 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 connect to either Mike or Spencer.
  
  We routinely upgrade the design (see version notes). Paid contributors to the design receive a new download link through e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for improved readability
• Updates to placeholder worths
• 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 revisions to logic in I59
  
  Version 2.3
  
  - Fixed concern 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 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 worths.
• 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 enhanced user experience.
• Added a 'Quick Start Guide' to offer a tutorial for using 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 evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 format to better distinguish 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 colleagues for commercial realty. He has 20+ years of CRE experience and has actually financed over $30 billion in real estate throughout top institutional firms.