The subject of ground leases has shown up numerous times in the past few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our property monetary 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.

This design can be used standalone, or to your existing property-level design. In either case, it is handy for both landowners looking to size a ground lease payment or leasehold owners wanting to comprehend the value of the leasehold (i.e. improvements) relative to the charge easy 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 unknown with the concepts of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where a real estate financier rents the land (i.e. ground) just. When it comes to a ground lease, generally one party owns the land (i.e. charge simple interest) while a different party owns the improvements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the enhancements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where a specific or entity (lessee) rents 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 normally own the enhancements on the land and utilize 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 use of the land. At the end of the ground lease term, the lessee needs to return use of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime locations, where landowners don't always wish to offer but where they might not have the expertise (or desire) to operate. Thus, they lease the land to somebody who owns and runs the enhancements 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 major cities.

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, popular retail occupants choose to develop and own their area but the designer doesn't necessarily wish to offer the land. So, the retail renter will consent to lease the ground for 40+ years and construct their own building on the rented land. Banks, nationwide dining establishments in outparcels, and large outlet store are examples of tenants that often agree 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 included on one worksheet. This is intentional to enable you to insert this design 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 design, along with discover important links connected to the model.

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

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

SF/M2 - In cell I3 enter whether the measure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is typical in property to add the name of the investment with (Ground Lease) to denote that the investment is for the cost basic 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 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for circumstances, you may be considering getting the arrive at which a Target Superstore is built. Target owns the building and is leasing the land for some extended duration of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section includes 4 required 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 commenced. This must 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 overall length of the ground lease, not the number of years remaining. 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 begin. This normally amounts to the Next Ground Lease Payment date, although the design was constructed 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 analyzing a much 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 the business regards to the ground lease, including payment amount, frequency, and rent increases. This section includes 5 inputs plus the choice to manually design the lease payment quantities.

Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see listed below), this amount may be for an annual or regular monthly payment. Lease Increase Method - The technique used to model lease boosts. This can either be: None - No lease boosts. % Inc. - A portion increase over the previous rent amount. $ Inc. - An amount boost over the previous lease amount. Custom - Manually model the lease payment amounts by year. If Custom is chosen, the annual lease payment quantities in row 26 end up being inputs for you to manually alter (i.e. font turns blue). Important Note: If you pick Custom and start 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) area where you calculate the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed value 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 value of the residential or commercial property as if there was no ground lease. Or simply put, a common direct cap assessment of a genuine estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings originated from leasing the enhancements, special 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 get to 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 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 expense (i.e. before inflation). Retenanting may include basic leasing costs, it might consist of renovation and leasing, or it might include taking apart the building and restoring 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 estimations are done before representing inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present value calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth calculation. It is computed by taking the residential or commercial property value net of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in the event you want to customize the reversion worth.

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

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section permits you to calculate the unlevered (i.e. before financial obligation) 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 expense, and see the matching returns from that financial investment. The section consists of just one input.

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

After entering the Ground Lease Investment Cost, the section 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 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 compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease and mean to fund the purchase, it is within this area where you can get in the debt presumptions, and see the matching return from that levered financial 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 design will compute the loan quantity.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
  
  After getting in the financial obligation assumptions for the ground lease financial investment, the section 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 based on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a pointer, for now the model only allows for debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final section is where backend inputs used in the different data recognition lists are found. Unless you intend to modify the model, there is no reason to change the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I've assembled a short video that walks you through the different sections of the design. Note that this video is based upon v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design available to everyone, it is used on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance helps keep the material coming - common realty valuation designs sell for $100 - $300+ per license). Just go into a rate 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 provide our designs on this basis, please connect to either Mike or Spencer.
  
  We regularly upgrade the design (see version notes). Paid factors to the model get a new download link via email each time the model 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 show more precise years of term staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  
  - Fixed issue 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 worths
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra notes under 'Quick Start Guide' to clarify common confusion around start dates for various 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 model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to allow for financier to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between assessment 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 much better differentiate between Valuations areas and Investment Returns areas.
• 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 coworkers for commercial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in realty throughout leading institutional companies.
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