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The subject of ground leases has turned up several times in the previous couple of weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the process of developing an Module for our property monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great time to share my Ground Lease Valuation Model in Excel.
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This design can be utilized standalone, or included to your existing property-level design. In either case, it is valuable for both landowners looking to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. improvements) relative to the charge easy interest (i.e. land).

Excel design for assessing 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 meanings 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 celebration owns the land (i.e. fee basic interest) while a different celebration owns the improvements (i.e. leasehold interest). In most cases, the owner of the land leases the land to the owner of the improvements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the fee easy owner (lessor) of the land for a prolonged time period. 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 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 needs to return use of the land, and any improvements thereon, to the land owner.

Ground leases are common to prime locations, where landowners do not necessarily wish to offer but where they may not have the knowledge (or desire) to operate. Thus, they lease the land to someone who owns and operates the improvements 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, prominent retail tenants prefer to develop and own their space however the designer doesn't always want to sell the land. So, the retail renter will accept lease the ground for 40+ years and develop their own building on the leased land. Banks, national dining establishments in outparcels, and large outlet store are examples of tenants that frequently concur to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing 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 intentional to allow you to insert this model into your own property-level model to make it much easier to add a ground lease part to your analysis.

All analysis is performed 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 crucial links associated with the design.

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

The Residential or commercial property Description area consists of 5 inputs associated to the investment. These inputs are:

SF/M2 - In cell I3 get in whether the procedure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is common in real estate to append the name of the investment with (Ground Lease) to represent that the 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 immediately 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 assumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different individual or entity. So for example, you might be considering obtaining the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some extended time period. The total rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes four required inputs and one optional inputs. These inputs are related to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This ought to likewise be the month and year of the 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 total length of the ground lease, not the variety of years remaining. 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 usually is equal to the Next Ground Lease Payment date, although the model was constructed 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 occasion you're evaluating a shorter hold period, simply alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes the service regards to the ground lease, including payment amount, frequency, and rent boosts. This section includes five inputs plus the alternative to by hand model the rent payment quantities.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see below), this amount might be for a yearly or month-to-month payment. Lease Increase Method - The technique used to model rent increases. This can either be: None - No lease boosts. % Inc. - A portion increase over the previous rent quantity. $ Inc. - A quantity boost over the previous rent amount. Custom - Manually design the rent payment amounts by year. If Custom is selected, the annual rent payment quantities in row 26 become inputs for you to manually alter (i.e. font style turns blue). Important Note: If you pick Custom and start to alter the annual rent payment amounts 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) section where you determine the reversion value of the land (i.e. ground lease), today 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 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 financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated 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 come to a worth 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 cost (i.e. before inflation). Retenanting may include basic leasing expenses, it may consist of remodelling and leasing, or it might consist of taking down the structure and rebuilding something new. The idea is to show up at a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Per Year) - All of the above computations are done before representing inflation (i.e. growth). Enter a growth 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 value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present value estimation. It is computed by taking the residential or commercial property value internet of any retenanting expenses, and after that growing it by a development rate. The worth is an optional input in the occasion you desire to tailor the reversion value.

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

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section allows you to compute 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 expense, and see the corresponding returns from that financial investment. The area includes simply one input.

Ground Lease Investment Cost - This is the cost to acquire land with a ground lease. It needs to consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses related 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 highly based on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area allows you to calculate the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about buying a ground lease and plan to finance the purchase, it is within this area where you can get in the financial obligation assumptions, and see the corresponding return from that levered investment. The section includes 3 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 Rate Of Interest - The annual rate to be paid on the mortgage. Note that the design presently only enables 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 presumptions for the ground lease 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
  
  Just like the unlevered analysis, the resulting returns are extremely dependent on the analysis duration, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a pointer, for now the model only enables for financial obligation 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 utilized in the numerous data validation lists are discovered. Unless you mean to customize the model, there is no reason to change the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I have actually assembled a brief video that strolls you through the numerous areas of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everybody, it is offered on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or optimum (your support helps keep the material coming - common realty valuation designs cost $100 - $300+ per license). Just get in a price together with an e-mail address to send out 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 models on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the design (see version notes). Paid contributors to the design receive 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 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 reflect more accurate years of term remaining.
• Updates to placeholder values
  
  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 the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to solve for problem 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 extra notes under 'Flying start Guide' to clarify typical confusion around start dates for various 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 offer a tutorial for utilizing the model.
• 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' presumption to enable financier to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between appraisal 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 distinguish 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 industrial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in genuine estate across top institutional firms.