The subject of ground leases has actually come up several times in the previous couple of weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the process of producing an Advanced Concepts Module for our property 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 Model in Excel.

This design can be utilized standalone, or contributed to your existing property-level design. In either case, it is practical for both landowners seeking to size a ground lease payment or leasehold owners wanting to comprehend the value of the leasehold (i.e. enhancements) relative to the charge simple interest (i.e. land).
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Excel model for evaluating 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 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, typically one party owns the land (i.e. fee easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). In most 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 real estate, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the fee basic owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will normally own the improvements on the land and utilize the land and improvements as if the lessee were the owner of the land. During the term of 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 enhancements thereon, to the land owner.

Ground leases prevail to prime locations, where landowners don't necessarily wish to sell but where they might not have the competence (or desire) to operate. Thus, they rent the land to somebody who owns and operates the improvements on the land, and get a ground lease payment in return. You see this quite typically with office buildings in the downtown core of significant cities.

Another case where you'll face ground leases are in retail shopping centers. Oftentimes, prominent retail renters choose to build and own their area however the designer does not always want 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 restaurants in outparcels, and large outlet store are examples of tenants that frequently consent to this structure.

Quick Note: Not interested in 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 consisted of on one worksheet. This is deliberate to allow you to place this design into your own property-level model to make it much easier to include a ground lease component to your analysis.

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

The Ground Lease worksheet is separated into 7 sections as outlined and described listed below:

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

SF/M2 - In cell I3 go into 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 property to append the name of the financial investment with (Ground Lease) to denote 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 number of acres or hectares will than immediately be computed 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. enhancements) to be owned by a separate person or entity. So for example, you may be considering getting the arrive on which a Target Superstore is constructed. Target owns the structure and is leasing the land for some prolonged duration of time. The overall rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of 4 needed inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease began. This need 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 commencement through ground lease maturity. This is the overall length of the ground lease, not the variety of years staying. The maximum length is 100 years. Based on the ground lease length, the model 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 generally amounts to the Next Ground Lease Payment date, although the model was developed to enable 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 case you're analyzing 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 consists of business regards to the ground lease, consisting of payment quantity, frequency, and lease boosts. This section consists of 5 inputs plus the alternative to manually model the rent payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for a yearly or monthly payment. Lease Increase Method - The method used to design lease increases. This can either be: None - No lease boosts. % Inc. - A portion boost over the previous lease amount. $ Inc. - An amount increase over the previous rent amount. Custom - Manually design the rent payment quantities by year. If Custom is picked, the annual lease payment quantities in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you choose Custom and begin to change the yearly lease payment quantities 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) 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 value of the leasehold interest. This area is broken up into three subsections, with 5 inputs and one optional input across the three 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 to put it simply, a common direct cap appraisal of a realty financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings stemmed 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 consisted of. The concept being to reach 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 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 simple leasing expenses, it might include restoration and leasing, or it may consist of tearing down the building and reconstructing something new. The concept is to come to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. development). Enter a development 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 value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth estimation. It is determined 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 wish to personalize the reversion worth.

Discount Rate - The discount rate at which to calculate today value of the ground lease capital. Consider this discount rate as an obstacle 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 debt) returns of a ground lease financial investment. If you are considering acquiring a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The section consists of just one input.

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

After entering the Ground Lease Investment Cost, the area determines 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 period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area permits you to calculate the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about buying a ground lease and mean to fund the purchase, it is within this section where you can get in the financial obligation presumptions, and see the corresponding return from that levered investment. The area consists of 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 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 regular monthly or yearly.
  
  After going into the debt assumptions for the ground lease financial investment, the section 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 dependent on the analysis period, payment schedule, and reversion value. The amount and rate of the debt will also greatly drive the levered return. And as a tip, in the meantime the model only permits for 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 utilized in the numerous information recognition lists are found. Unless you mean 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 composed assistance above, I've created a brief video that walks you through the different 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 model accessible to everybody, it is used on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance assists keep the material coming - typical genuine estate valuation models cost $100 - $300+ per license). Just get in a price together with an email address to send the download link to, and then click 'Continue'. If you have any concerns about our "Pay What You're Able" program or why we use our designs on this basis, please connect to either Mike or Spencer.
  
  We regularly update the design (see version notes). Paid contributors to the design receive a brand-new download link by means of e-mail each time the design is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for enhanced readability
• Updates to placeholder worths
• 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 staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further revisions to logic in I59
  
  Version 2.3
  
  - Fixed issue where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing out on the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to fix for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added extra 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 'Quick Start Guide' to provide a tutorial for using the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable financier to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 formatting to much better separate between Valuations sections and Investment Returns sections.
• 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 genuine estate. He has 20+ years of CRE experience and has actually financed over $30 billion in realty throughout top institutional companies.