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The subject of ground leases has turned up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of developing 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 contributed to your existing property-level model. In any case, it is helpful for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. improvements) relative to the fee simple interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the concepts of Ground Lease and Interest, I'll refer you to the meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where a real estate investor rents the land (i.e. ground) only. When it comes to a ground lease, usually one celebration owns the land (i.e. charge basic interest) while a separate celebration owns the improvements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the improvements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the cost basic owner (lessor) of the land for an extended period of time. The lessee of a leasehold estate will typically own the improvements on the land and use 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 enhancements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners don't always desire to offer however where they might not have the knowledge (or desire) to run. Thus, they rent the land to someone who owns and operates 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 significant cities.

Another case where you'll run into ground leases are in retail shopping centers. Oftentimes, prominent retail renters prefer to build and own their area but the designer doesn't always want to sell the land. So, the retail occupant will concur to lease the ground for 40+ years and construct their own structure on the rented land. Banks, nationwide dining establishments in outparcels, and big department shops are examples of occupants that often agree to this structure.

Quick Note: Not thinking about 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 enable you to insert this design into your own property-level design to make it easier to add a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the model, along with find crucial links connected to the model.

The Ground Lease worksheet is broken up into 7 areas as outlined and explained below:

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

SF/M2 - In cell I3 go into whether the step of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is typical in real estate to add the name of the financial investment with (Ground Lease) to represent that the financial investment is for the cost simple 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 number of acres or hectares will than automatically 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 individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for example, you may be considering acquiring the arrive on which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged amount of time. The total rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of four required 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 commenced. This ought to also 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 beginning through ground lease maturity. This is the total length of the ground lease, not the variety of years remaining. The optimum length is 100 years. Based on the ground lease length, the design then determines 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 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 the event you're analyzing a shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes the company regards to the ground lease, consisting of payment amount, frequency, and lease increases. This section consists of five inputs plus the alternative to by hand design the rent payment amounts.
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Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see listed below), this quantity might be for an annual or monthly payment. Lease Increase Method - The technique utilized to model rent increases. This can either be: None - No rent boosts. % Inc. - A percentage boost over the previous lease amount. $ Inc. - An amount boost over the previous rent quantity. Custom - Manually model the rent payment quantities by year. If Custom is chosen, the yearly rent payment amounts in row 26 become inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you select Custom and start 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 determine the reversion value of the land (i.e. ground lease), today 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 three 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 simply put, a normal direct cap evaluation of a property financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings obtained 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 included. The idea being to show up at 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 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 might include easy leasing costs, it may include restoration and leasing, or it might include taking apart the structure and reconstructing something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above calculations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value calculation. It is computed by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you want to tailor the reversion value.

Discount Rate - The discount rate at which to compute the present worth of the ground lease cash flows. 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) area enables you to determine the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are considering buying 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 area includes simply one input.

Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It must 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 area computes 5 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 dependent on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section allows you to determine the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering buying a ground lease and plan to fund the purchase, it is within this section where you can get in the debt assumptions, 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 design will calculate the loan amount.
• Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the design currently only allows for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or every year.
  
  After going into the debt presumptions for the ground lease investment, the area determines five return metrics:
  
  - - Levered Internal Rate of Return
• Levered Equity Multiple
• Net Profit
• Average Rate of Return
• Average Cash-on-Cash Return
  
  Similar to the unlevered analysis, the resulting returns are highly dependent on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a pointer, in the meantime the model only permits debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs utilized in the numerous data validation lists are found. Unless you intend to modify the design, there is no reason to alter 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've created a brief video that strolls 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 model available to everyone, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or maximum (your assistance helps keep the content coming - typical realty evaluation models cost $100 - $300+ per license). Just get in a price together with an e-mail address to send 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 designs on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the model (see variation notes). Paid contributors to the model get a brand-new download link via e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for enhanced readability
• Updates to placeholder values
• Fix to misspelled word on Version tab
  
  Version 2.32
  
  - Removed redundant details in E17: G17.
• Updated I22 to show more accurate years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
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  - Further modifications to reasoning in I59
  
  Version 2.3
  
  - Fixed concern 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 issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra notes under 'Quick Start Guide' to clarify common 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 improved user experience.
• Added a 'Quick Start Guide' to provide a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable investor to examine returns on an Analysis Period much 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 in between Valuations areas and Investment Returns sections.
• Adjusted return solutions 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 industrial real estate. He has 20+ years of CRE experience and has underwritten over $30 billion in property across leading institutional firms.