The subject of ground leases has turned up several 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'm in the process of developing an Advanced Concepts Module for our property financial 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.

This design can be utilized standalone, or added to your existing property-level model. In any case, it is helpful for both landowners seeking to size a ground lease payment or leasehold owners wanting to understand the worth of the leasehold (i.e. improvements) relative to the cost simple interest (i.e. land).

Excel design for assessing a ground lease

What is a Ground Lease and Interest?

If you unknown with the concepts 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 party owns the land (i.e. charge easy 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 amount of time (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 a prolonged period of time. The lessee of a leasehold estate will typically 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 should return usage of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners do not always wish to offer however where they may not have the expertise (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 on a regular basis with office complex in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, popular retail occupants choose to construct and own their space but the developer does not necessarily desire to sell the land. So, the retail occupant will accept lease the ground for 40+ years and develop their own structure on the leased land. Banks, national dining establishments in outparcels, and large 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 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 permit you to insert this model into your own property-level model to make it simpler to add a ground lease element to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can view a change log for the model, in addition to find crucial links associated with the model.

The Ground Lease worksheet is separated into seven areas as laid out and explained below:

The Residential or commercial property Description section consists of 5 inputs associated to the 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 add the name of the financial investment with (Ground Lease) to signify 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 variety of acres or hectares will than immediately be determined in cell E6. Leasehold Net Rentable Area - Total net rentable area 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 person or entity. So for example, you might be considering obtaining the arrive on which a Target Superstore is constructed. Target owns the building and is renting the land for some extended period of time. The total rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 4 needed 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 should 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 variety of years staying. 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 typically is equal to the Next Ground Lease Payment date, although the model was built 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 examining a much shorter hold period, merely alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area consists of business regards to the ground lease, consisting of payment amount, frequency, and lease boosts. This area consists of 5 inputs plus the alternative to manually design the rent payment quantities.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity may be for a yearly or month-to-month payment. Lease Increase Method - The technique used to design lease boosts. This can either be: None - No lease boosts. % Inc. - A portion boost over the previous lease amount. $ Inc. - An amount increase over the previous lease quantity. Custom - Manually design the rent payment quantities 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 select Custom and begin to alter the yearly rent payment amounts in row 26, there is no 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 value of the leasehold interest. This area is broken up into three subsections, with five inputs and one optional input across the 3 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 typical direct cap assessment of a real estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from renting the enhancements, 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 accounting for the ground lease. Retenanting Costs (Nominal) - At the end of the ground lease term, the ground lessor will return 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 include basic leasing expenses, it may consist of remodelling and leasing, or it might consist of taking down the structure and rebuilding something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get here at a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth calculation. It is calculated by taking the residential or commercial property worth internet of any retenanting costs, and after that growing it by a growth rate. The value is an optional input in the occasion you desire to customize the reversion value.

Discount Rate - The discount rate at which to determine the present value 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 investment. If you are considering buying 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 section includes simply one input.

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

After getting in the Ground Lease Investment Cost, the section 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 highly based 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 debt) returns of a ground lease financial investment. If you are thinking about acquiring 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 matching return from that levered investment. The section consists of 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan amount.
• Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model presently only permits for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or yearly.
  
  After getting in the financial obligation assumptions for the ground lease financial investment, the area computes 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 depending on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will also heavily drive the levered return. And as a tip, in the meantime the design only permits 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 numerous information validation lists are found. Unless you intend to customize the design, there is no reason to alter the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I have actually put together a brief video that strolls you through the numerous sections of the design. 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 (enter $0 if you 'd like) or optimum (your assistance assists keep the content coming - normal real estate assessment designs cost $100 - $300+ per license). Just get in a cost together with an email address to send out 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 connect to either Mike or Spencer.
  
  We frequently upgrade the model (see variation notes). Paid factors to the design get a new download link by means of email each time the model is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick Start Guide' with updates and for improved readability
• Updates to placeholder worths
• 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 remaining.
• 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 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 repair!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra 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 improved user experience.
• Added a 'Quick Start Guide' to supply a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to permit investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between assessment 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 in between Valuations sections and Investment Returns areas.
• 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 real estate throughout top institutional firms.
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