The topic of ground leases has come up a number of 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 creating 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 Valuation Model in Excel.

This design can be used standalone, or included to your existing property-level design. Either method, it is valuable for both landowners wanting to size a ground lease payment or leasehold owners wanting to comprehend the value of the (i.e. enhancements) relative to the charge simple interest (i.e. land).

Excel model for evaluating 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 definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor leases 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 separate party owns the improvements (i.e. leasehold interest). Most of the times, 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 describes a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for an extended duration of time. 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 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 must return use of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime locations, where landowners don't always want to sell however where they might not have the know-how (or desire) to run. Thus, they lease the land to someone who owns and runs the improvements on the land, and get a ground lease payment in return. You see this on a regular basis with office structures in the downtown core of significant cities.

Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, popular retail occupants choose to develop and own their area however the designer does not always desire to offer the land. So, the retail tenant will agree to lease the ground for 40+ years and construct their own structure on the leased land. Banks, nationwide restaurants in outparcels, and big department stores are examples of occupants that typically accept this structure.

Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling job.

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to permit you to insert this model into your own property-level model to make it simpler to include a ground lease component 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 modification log for the design, as well as discover essential links related to the model.

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

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

SF/M2 - In cell I3 go into whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is typical in realty to add the name of the investment with (Ground Lease) to denote that the investment is for the charge 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 variety of acres or hectares will than instantly 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 presumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for example, you may be thinking about getting the arrive on which a Target Superstore is built. Target owns the building and is renting the land for some prolonged period of time. The overall rentable location 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 belong to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. This ought to 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 beginning through ground lease maturity. This is the total 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 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 is equal to the Next Ground Lease Payment date, although the design was built to enable 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 examining 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 section consists of the organization regards to the ground lease, including payment quantity, frequency, and lease boosts. This area includes 5 inputs plus the option to manually model the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this amount may 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 percentage boost over the previous rent quantity. $ Inc. - An amount boost over the previous rent amount. Custom - Manually design the rent payment quantities by year. If Custom is chosen, the annual 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 choose Custom and begin to alter the yearly 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 compute the reversion worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is broken up into three subsections, with five inputs and one optional input across the three 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 normal direct cap appraisal of a genuine estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from leasing the improvements, 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 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 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 may consist of simple leasing expenses, it might consist of renovation and leasing, or it may include taking apart the building and reconstructing something new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Annually) - All of the above computations are done before representing 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)' utilized as the reversion value in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value estimation. It is computed by taking the residential or commercial property value internet of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in case you wish to tailor the reversion worth.

Discount Rate - The discount rate at which to compute today worth of the ground lease money circulations. Consider this discount rate as a difficulty 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 permits you to determine 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 area where you can enter your acquisition/investment cost, and see the matching returns from that 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 expense, together with any other due diligence, closing, and pursuit costs associated with the investment.

After going into the Ground Lease Investment Cost, the area determines 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 highly dependent on the analysis duration, payment schedule, and reversion worth.
  
  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 considering acquiring a ground lease and intend 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 financial investment. The area consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan amount.
• Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the design presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or annually.
  
  After entering the financial obligation assumptions for the ground lease financial investment, the section determines 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 depending on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will likewise heavily drive the levered return. And as a tip, for now the model only enables debt with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last section is where backend inputs utilized in the various information validation lists are found. Unless you plan to customize the design, there is no factor to alter the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I have actually assembled a brief video that walks you through the numerous areas of the design. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design accessible to everybody, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or maximum (your assistance assists keep the content coming - common genuine estate assessment designs cost $100 - $300+ per license). Just go into a cost 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 provide our models on this basis, please reach out to either Mike or Spencer.
  
  We regularly update the design (see version notes). Paid contributors to the model get a brand-new download link through email each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for improved 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 accurate years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed problem 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 concern 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 worths.
• Added extra notes under 'Flying start Guide' to clarify typical confusion around start dates for different 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 offer a tutorial for utilizing the model.
• 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 analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 much better distinguish between Valuations areas and Investment Returns areas.
• 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 industrial realty. He has 20+ years of CRE experience and has actually financed over $30 billion in genuine estate across leading institutional firms.