The topic of ground leases has come up a number of times in the past few weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the process of creating an Advanced Concepts Module for our realty 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 Model in Excel.

This design can be used standalone, or added to your existing property-level model. Either way, it is practical for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. enhancements) relative to the fee basic interest (i.e. land).

Excel model for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar 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 rents the land (i.e. ground) just. When it comes to a ground lease, generally one party owns the land (i.e. charge easy interest) while a different celebration owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the improvements for a prolonged period of time (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest describes a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the charge easy owner (lessor) of the land for an extended duration of time. The lessee of a leasehold estate will usually own the enhancements on the land and use the land and improvements 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 use 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 necessarily wish to offer but where they may not have the proficiency (or desire) to run. Thus, they rent the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this frequently with office structures in the downtown core of major cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, prominent retail tenants choose to construct and own their area but the developer does not necessarily want to offer the land. So, the retail renter will consent to lease the ground for 40+ years and construct their own structure on the rented land. Banks, national dining establishments in outparcels, and large department shops are examples of occupants that frequently consent to this structure.

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

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are consisted of 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 likewise consisted of where you can see a change log for the design, as well as find essential links connected to the model.

The Ground Lease worksheet is broken up into 7 sections as outlined and described 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 go into whether the procedure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is typical in genuine estate to add the name of the investment with (Ground Lease) to denote that the investment is for the charge 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 number of acres or hectares will than instantly be calculated in cell E6. Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for example, you might be thinking about getting the land on which a Target Superstore is built. Target owns the building and is renting the land for some extended time period. The total rentable area of the structure 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 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 need 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 commencement 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 normally is equal to the Next Ground Lease Payment date, although the model was developed to allow 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 event you're evaluating a shorter hold period, just alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains business terms of the ground lease, consisting of payment amount, frequency, and lease increases. This section consists of five inputs plus the choice to by hand design the lease payment quantities.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this quantity might be for an annual or monthly payment. Lease Increase Method - The method used to design rent increases. This can either be: None - No lease increases. % Inc. - A percentage boost over the previous lease amount. $ Inc. - An amount boost over the previous lease amount. Custom - Manually design the lease payment amounts by year. If Custom is selected, the yearly rent payment amounts in row 26 become inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you choose Custom and start to change the yearly rent payment quantities in row 26, there is no chance to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) area where you compute the reversion worth of the land (i.e. ground lease), the present worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is broken up into three subsections, with 5 inputs and one optional input throughout 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 to put it simply, a common direct cap evaluation of a property investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income originated from leasing the improvements, exclusive 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 concept being to get 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 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 cost (i.e. before inflation). Retenanting might consist of easy leasing costs, it might include restoration and leasing, or it might consist of taking apart the building and restoring something new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before accounting for inflation (i.e. growth). Enter a development 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 worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth estimation. It is calculated by taking the residential or commercial property value web of any retenanting expenses, and then growing it by a growth rate. The worth is an optional input in the occasion you want to personalize the reversion value.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease money flows. Think of this discount rate as an obstacle 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 calculate the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering acquiring a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The area includes just one input.

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

After getting in 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 extremely depending on the analysis duration, payment schedule, and reversion worth.
  
  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 financial investment. If you are considering 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 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 determine the loan amount.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the model currently just enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.
  
  After entering the debt presumptions 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 reliant on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will also greatly drive the levered return. And as a suggestion, in the meantime the design only enables financial obligation with interest-only payments and a balloon at the end of the analysis period.
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  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs utilized in the various data recognition lists are found. Unless you intend to customize the model, there is no reason to alter the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I have actually put together a short video that walks you through the numerous sections of the design. Note that this video is based upon v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this design accessible to everybody, it is offered on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your support helps keep the material coming - normal real estate assessment models offer for $100 - $300+ per license). Just enter a price together with an email address to send out 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 use our designs on this basis, please connect to either Mike or Spencer.
  
  We routinely update the model (see version notes). Paid factors to the model receive a new download link by means of email 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 information in E17: G17.
• Updated I22 to reflect more precise years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further revisions to logic in I59
  
  Version 2.3
  
  - Fixed concern 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 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 'Quick 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 using 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' assumption to permit financier to analyze 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 format to much better distinguish in 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 genuine estate. He has 20+ years of CRE experience and has financed over $30 billion in real estate across leading institutional firms.