The subject of ground leases has actually come up a number of times in the past couple of weeks. Numerous A.CRE readers have 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 monetary modeling Accelerator program covering the of modeling ground leases. So I believed now would be an excellent time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or contributed to your existing property-level design. In any case, it is practical for both landowners wanting to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. enhancements) relative to the cost basic interest (i.e. land).

Excel model for evaluating 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) only. In the case of a ground lease, usually one party owns the land (i.e. fee basic interest) while a different party owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the enhancements for a prolonged duration of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the fee basic owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will generally own the improvements on the land and use the land and improvements 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 use 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 places, where landowners don't always desire to sell however where they might not have the know-how (or desire) to operate. Thus, they lease the land to someone who owns and runs the improvements on the land, and get 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 encounter ground leases are in retail shopping mall. Oftentimes, popular retail tenants choose to build and own their space however the designer doesn't necessarily wish to sell the land. So, the retail tenant will accept rent the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and big department shops are examples of renters that frequently accept this structure.

Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to handle 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 deliberate to allow you to place this model into your own property-level design to make it simpler to add a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a modification log for the model, as well as find important links associated with the design.

The Ground Lease worksheet is separated into seven areas as described and explained 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 investment. It is common in property to append the name of the financial investment with (Ground Lease) to represent that the financial investment is for the cost easy 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 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. improvements) to be owned by a separate person or entity. So for instance, you might be thinking about obtaining the land on which a Target Superstore is developed. Target owns the building and is leasing the land for some prolonged amount of time. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of 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 should 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 overall length of the ground lease, not the number of years staying. The maximum length is 100 years. Based on the ground lease length, the design then calculates the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to start. This normally is equal to the Next Ground Lease Payment date, although the model was built to permit analysis to begin 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 evaluating a shorter hold period, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes business terms of the ground lease, consisting of payment quantity, frequency, and lease boosts. This section consists of five inputs plus the choice to by hand 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 quantity may be for a yearly or monthly payment. Lease Increase Method - The method utilized to design rent boosts. This can either be: None - No rent boosts. % Inc. - A percentage boost over the previous rent quantity. $ Inc. - An amount boost over the previous rent amount. Custom - Manually design the rent payment quantities by year. If Custom is chosen, the yearly lease payment quantities in row 26 become inputs for you to by hand alter (i.e. typeface turns blue). Important Note: If you pick Custom and begin to alter the yearly 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 determine 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 section is broken up 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 normal direct cap assessment of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income obtained from renting 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 idea 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 improvements 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 might consist of easy leasing costs, it may include remodelling and leasing, or it may include taking down the structure and rebuilding something brand-new. The concept is to come to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above calculations 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 worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used 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 worth is an optional input in case you want to customize the reversion worth.

Discount Rate - The discount rate at which to compute the present worth of the ground lease capital. Think of this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area allows you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering acquiring a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The section includes simply one input.

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

After going into the Ground Lease Investment Cost, the section calculates 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 depending on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and mean to finance the purchase, it is within this area where you can go into the debt assumptions, and see the corresponding 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 model will compute the loan amount.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently only allows for 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 entering the financial obligation assumptions 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
  
  As with the unlevered analysis, the resulting returns are extremely depending on the analysis duration, payment schedule, and reversion value. The amount and rate of the debt will likewise heavily drive the levered return. And as a pointer, in the meantime the model only enables financial obligation with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the various data validation lists are found. Unless you mean to customize the design, there is no reason to alter the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I have actually created 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 accessible to everybody, it is provided on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your assistance helps keep the content coming - typical property valuation designs sell for $100 - $300+ per license). Just get in a price together with an email address to send out the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our models on this basis, please reach out to either Mike or Spencer.
  
  We frequently update the design (see variation notes). Paid factors to the design get a brand-new download link via e-mail each time the model is upgraded.
  
  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 details in E17: G17.
• Updated I22 to reflect more precise years of term remaining.
• Updates to placeholder values
  
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed concern where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing out on 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 values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for different 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 'Flying 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 much 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 formatting to much better distinguish in between Valuations areas and Investment Returns sections.
• Adjusted return solutions 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 colleagues for business property. He has 20+ years of CRE experience and has underwritten over $30 billion in property throughout leading institutional companies.
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