The subject of ground leases has actually turned up several times in the past few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of producing an Advanced Concepts Module for our genuine estate financial 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.
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This design can be used standalone, or contributed to your design. In any case, it is handy for both landowners seeking to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. enhancements) relative to the cost simple interest (i.e. land).

Excel design for assessing 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 definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where a genuine estate 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 separate party owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land leases the land to the owner of the enhancements for an extended time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the charge basic owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will usually own the enhancements 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 usage 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 want to offer however where they may not have the expertise (or desire) to run. Thus, they rent the land to somebody who owns and runs the improvements on the land, and get a ground lease payment in return. You see this quite frequently with office complex in the downtown core of major cities.

Another case where you'll encounter ground leases are in retail shopping centers. Oftentimes, popular retail occupants choose to develop and own their space but the developer doesn't always want to sell 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, nationwide dining establishments in outparcels, and big 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 handle your bespoke modeling project.

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 permit you to place this design into your own property-level model to make it much easier to include 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 modification log for the model, along with find important links related to the model.

The Ground Lease worksheet is broken up into seven areas as laid out and explained listed below:

The Residential or commercial property Description section includes five inputs related to the financial investment. These inputs are:

SF/M2 - In cell I3 go into whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in realty to add the name of the investment with (Ground Lease) to signify that the financial investment is for the fee 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 computed 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 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 circumstances, you may be thinking about acquiring the arrive on which a Target Superstore is constructed. Target owns the building and is renting the land for some extended 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 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 started. This need to likewise 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 start through ground lease maturity. This is the total length of the ground lease, not the number of years remaining. The optimum 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 usually amounts to the Next Ground Lease Payment date, although the design was built to permit 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 evaluating a shorter hold period, merely alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of business terms of the ground lease, including payment amount, frequency, and lease boosts. This section includes 5 inputs plus the option to by hand design the rent payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see listed below), this amount might be for an annual or month-to-month payment. Lease Increase Method - The approach utilized to design lease increases. This can either be: None - No lease boosts. % Inc. - A portion boost over the previous rent quantity. $ Inc. - An amount boost over the previous rent amount. Custom - Manually model the rent payment amounts by year. If Custom is selected, the annual rent payment amounts in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you pick Custom and begin to alter 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) section where you determine the reversion worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into three subsections, with 5 inputs and one optional input across the 3 subsections.

Ground Lease Reversion Value - Within this subsection you model the value of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap valuation of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived from leasing 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 consisted of. 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 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 may consist of simple leasing expenses, it might include restoration and leasing, or it might include taking down the structure and reconstructing something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value estimation. It is determined by taking the residential or commercial property worth internet of any retenanting expenses, and then growing it by a development rate. The value is an optional input in case you wish to customize the reversion value.

Discount Rate - The discount rate at which to calculate today value of the ground lease cash circulations. Think of this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area enables you to determine the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering purchasing a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the matching returns from that investment. The area consists of 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 expenses connected to the investment.

After entering 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 extremely depending on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits 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 plan to fund the purchase, it is within this area where you can get in the debt assumptions, and see the matching return from that levered financial investment. The section includes 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 quantity.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the design presently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
  
  After going into the debt presumptions 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
  
  Just like the unlevered analysis, the resulting returns are highly reliant on the analysis duration, payment schedule, and reversion worth. The quantity and rate of the debt will also heavily drive the levered return. And as a reminder, for now the model only allows for 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 used in the various information validation lists are discovered. Unless you intend 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 written guidance above, I've put together a short video that strolls you through the various sections of the model. Note that this video is based upon v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everyone, it is offered on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your support helps keep the content coming - typical property appraisal designs offer for $100 - $300+ per license). Just enter a cost 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 connect to either Mike or Spencer.
  
  We frequently upgrade the model (see variation notes). Paid contributors to the design get a new download link by means of email each time the model is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for improved 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 precise years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications 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 concern 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 common 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 enhanced user experience.
• Added a 'Flying Start Guide' to supply a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to enable financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between evaluation 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 differentiate between Valuations sections 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 colleagues for commercial property. He has 20+ years of CRE experience and has underwritten over $30 billion in property across leading institutional companies.
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