The topic of ground leases has 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 remain in the procedure of developing an Module for our property monetary modeling Accelerator program covering the mechanics 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 added to your existing property-level design. Either method, it is useful for both landowners wanting to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).
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Excel model for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the ideas 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 an investor leases the land (i.e. ground) only. When it comes to a ground lease, generally one celebration owns the land (i.e. charge simple interest) while a separate celebration owns the improvements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the enhancements for a prolonged amount of time (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 easy owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will generally own the enhancements on the land and utilize 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 rent to the lessor for use of the land. At the end of the ground lease term, the lessee should return use of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners do not necessarily want to sell but where they may not have the knowledge (or desire) to operate. Thus, they lease the land to someone who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this frequently with office buildings in the downtown core of major cities.

Another case where you’ll face ground leases remain in retail shopping mall. Oftentimes, popular retail occupants choose to develop and own their area but the developer doesn’t necessarily wish to offer the land. So, the retail renter will agree to lease the ground for 40+ years and construct their own structure on the leased land. Banks, national restaurants in outparcels, and large department stores are examples of occupants that typically concur to 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 consisted of on one worksheet. This is deliberate to allow you to insert this model into your own property-level design to make it simpler to include a ground lease part to your analysis.

All analysis is performed on the tab entitled ‘Ground Lease’. A ‘Version’ tab is likewise consisted of where you can view a modification log for the design, in addition to find crucial links connected to the design.

The Ground Lease worksheet is broken up into seven areas as described and described below:

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

SF/M2 - In cell I3 enter whether the measure of size remains 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 represent that the financial investment is for the fee easy 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 automatically be determined in cell E6. Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (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 individual or entity. So for circumstances, you may be thinking about getting the arrive on which a Target Superstore is developed. Target owns the building and is renting the land for some prolonged duration 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 section consists of 4 required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease started. This must 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 remaining. 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 start. This typically amounts to the Next Ground Lease Payment date, although the design was developed 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 the event you’re analyzing a much shorter hold duration, just change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains the organization regards to the ground lease, including payment quantity, frequency, and rent increases. This area includes five inputs plus the alternative to by hand model the rent payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this quantity might be for an annual or regular monthly payment. Lease Increase Method - The approach used to model lease boosts. This can either be: None - No rent boosts. % Inc. - A portion boost over the previous rent quantity. $ Inc. - An amount increase over the previous rent amount. Custom - Manually model the lease payment amounts by year. If Custom is picked, the yearly lease payment amounts in row 26 end up being inputs for you to by hand change (i.e. font style turns blue). Important Note: If you select Custom and start to change the yearly rent payment amounts in row 26, there is no method 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 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 area is separated into 3 subsections, with five inputs and one optional input across the 3 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 common direct cap evaluation of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings originated 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 come 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 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 consist of easy leasing expenses, it may consist of remodelling and leasing, or it might include taking down the structure and reconstructing something brand-new. The concept is to come to a ‘Net Reversion Value (Nominal)’ after accounting for the expense to retenant. Reversion Growth Rate (Annually) - All of the above estimations are done before accounting for inflation (i.e. development). Enter a development rate here, and the ‘Net Reversion Value (Nominal)’ will be grown to reach a ‘Reversion Value (Adjusted for Growth)’ used as the reversion value in the ground lease present value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value calculation. It is determined by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in the occasion you wish to personalize the reversion worth.

Discount Rate - The discount rate at which to determine the present value of the ground lease capital. Think of this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area allows you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about acquiring a ground lease, it is within this area 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 cost to acquire land with a ground lease. It must 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 area 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 reliant on the analysis period, payment schedule, and reversion worth.
  
  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 considering purchasing a ground lease and plan to finance the purchase, it is within this area where you can enter the financial obligation 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 Interest Rate - The yearly rate to be paid on the mortgage. Note that the design 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 annually.
  
  After getting in the financial obligation presumptions 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 extremely depending on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will likewise heavily drive the levered return. And as a reminder, in the meantime the design just enables debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last section is where backend inputs used in the numerous information validation lists are found. Unless you plan to customize 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 have actually put together a brief video that strolls you through the numerous areas 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 everybody, it is used on a “Pay What You’re Able” basis without any minimum (go into $0 if you ’d like) or maximum (your support helps keep the content coming - common realty assessment models sell for $100 - $300+ per license). Just go into a rate together with an email address to send the download link to, and after that click ‘Continue’. If you have any concerns 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 design (see variation notes). Paid factors to the model receive a 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 worths
  
  Version 2.31
  
  - Further modifications to reasoning 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 issue 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 worths.
• Added additional notes under ‘Flying 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 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 clarification functions.
• Renamed ‘Ground Lease Reversion Value’ to ‘Current Fee Simple Value and Ground Lease Reversion Value’.
• Added ‘Investment Term’ assumption to enable for investor to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed ‘Investment Timing’ to ‘Valuation Timing’ to differentiate in 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 areas and Investment Returns sections.
• 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 coworkers for business genuine estate. He has 20+ years of CRE experience and has actually underwritten over $30 billion in property across leading institutional companies.