The subject of has actually come up a number of times in the past couple of 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 Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a good 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 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 simple 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 concepts 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. When it comes to a ground lease, generally one party owns the land (i.e. charge basic interest) while a separate party owns the improvements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the cost 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 improvements 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 use of the land. At the end of the ground lease term, the lessee needs to return usage of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime places, where landowners do not always wish to offer but where they may not have the knowledge (or desire) to run. Thus, they lease the land to someone who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this rather typically with office complex in the downtown core of major cities.

Another case where you'll face ground leases are in retail shopping mall. Oftentimes, prominent retail tenants prefer to construct and own their area however the developer does not always desire to sell the land. So, the retail occupant will accept lease the ground for 40+ years and construct their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of renters that typically concur 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 sections of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to allow you to place this model into your own property-level design to make it easier to include a ground lease component to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can view a change log for the design, along with find essential links connected to the design.

The Ground Lease worksheet is separated into seven sections as detailed 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 enter whether the step of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is common in genuine estate to append the name of the investment with (Ground Lease) to signify that the financial investment is for the charge easy 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 variety of acres or hectares will than instantly 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 presumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a different individual or entity. So for example, you might be thinking about getting the arrive on which a Target Superstore is built. Target owns the structure and is leasing the land for some prolonged duration 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 needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and 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 total length of the ground lease, not the number of years staying. The optimum length is 100 years. Based upon the ground lease length, the model 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 generally is equal to the Next Ground Lease Payment date, although the design was built to permit for analysis to begin 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 evaluating a shorter hold period, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains business terms of the ground lease, including payment quantity, frequency, and lease increases. This area includes five inputs plus the alternative to by hand model the lease payment quantities.

Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see listed below), this quantity might be for a yearly or month-to-month payment. Lease Increase Method - The approach used to design lease increases. This can either be: None - No lease increases. % Inc. - A percentage increase over the previous lease quantity. $ Inc. - An amount boost over the previous rent quantity. Custom - Manually model the lease payment amounts by year. If Custom is chosen, the annual lease payment quantities in row 26 become inputs for you to manually alter (i.e. font style turns blue). Important Note: If you select Custom and start to alter the annual lease payment quantities 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) area where you compute the reversion worth 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 section is broken up into three subsections, with five inputs and one optional input throughout 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 in other words, a typical direct cap valuation of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings 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 included. The idea being to reach a value 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 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 easy leasing expenses, it may include remodelling and leasing, or it might include tearing down the structure and reconstructing something new. The concept is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Each Year) - All of the above estimations 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)' used as the reversion worth in the ground lease present value calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value estimation. It is determined by taking the residential or commercial property value net of any retenanting costs, and then growing it by a growth rate. The worth is an optional input in the event you want to customize the reversion value.

Discount Rate - The discount rate at which to compute the present worth of the ground lease money flows. Think of this discount rate as an obstacle rate (i.e. necessary rate of return) for a ground lease investment.
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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 considering acquiring a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The area consists of simply one input.

Ground Lease Investment Cost - This is the cost to get land with a ground lease. It must consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.

After going into 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 duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering acquiring a ground lease and mean to finance the purchase, it is within this area where you can get in the debt presumptions, and see the matching 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 compute the loan amount.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
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  After going into the debt assumptions for the ground lease 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
  
  As with the unlevered analysis, the resulting returns are extremely based on the analysis period, payment schedule, and reversion worth. The amount and rate of the debt will also greatly drive the levered return. And as a tip, in the meantime the design just allows for debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the numerous information recognition lists are discovered. Unless you intend to customize the design, there is no reason to change the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I've put together a short video that walks you through the different sections 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 everyone, it is used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your support assists keep the material coming - common realty valuation designs sell for $100 - $300+ per license). Just get in a price together with an email address to send out the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we provide our designs on this basis, please connect to either Mike or Spencer.
  
  We frequently update the design (see version notes). Paid factors to the design get a brand-new download link by means of 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 values
• 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 worths
  
  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 out on 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 repair!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added extra notes under 'Flying start Guide' to clarify typical confusion around start dates for various sections.
• 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 explanation purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to permit for 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 appraisal 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 distinguish between Valuations sections and Investment Returns areas.
• Adjusted return solutions 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 realty. He has 20+ years of CRE experience and has underwritten over $30 billion in genuine estate throughout top institutional companies.