The subject of ground leases has turned up a number of times in the past few weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the of creating an Advanced Concepts Module for our realty 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 model can be utilized standalone, or included to your existing property-level model. In any case, it is handy for both landowners looking to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. improvements) relative to the cost basic interest (i.e. land).

Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the concepts 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 a genuine estate investor leases the land (i.e. ground) only. When it comes to a ground lease, usually one party owns the land (i.e. fee basic interest) while a separate party owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the improvements for an extended time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will usually own the enhancements on the land and use 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 rent to the lessor for usage of the land. At the end of the ground lease term, the lessee must return usage of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners do not always desire to offer however where they may not have the knowledge (or desire) to operate. Thus, they rent the land to someone who owns and runs the improvements on the land, and get a ground lease payment in return. You see this frequently 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, popular retail tenants choose to construct and own their space however the developer does not always want to offer the land. So, the retail tenant will agree to rent the ground for 40+ years and construct their own structure on the rented land. Banks, national dining establishments in outparcels, and large department stores are examples of occupants that often accept this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to handle your bespoke modeling job.

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are included on one worksheet. This is intentional to enable you to place this design into your own property-level model to make it much easier to add a ground lease part to your analysis.

All analysis is carried out 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 essential links connected to the design.

The Ground Lease worksheet is broken up into seven sections as described and explained below:

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

SF/M2 - In cell I3 go into whether the measure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is typical in property to add the name of the investment with (Ground Lease) to represent that the investment is for the cost 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 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for circumstances, you may be considering obtaining the land 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 structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 4 needed inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease started. This need to also 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 variety of years remaining. 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 normally is equal to the Next Ground Lease Payment date, although the design was built to allow 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 the occasion you're analyzing a much shorter hold duration, just change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of business regards to the ground lease, consisting of payment amount, frequency, and lease increases. This area includes five inputs plus the option to by hand design the rent payment quantities.

Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see below), this quantity may be for a yearly or regular monthly payment. Lease Increase Method - The approach used to design rent increases. This can either be: None - No lease increases. % Inc. - A percentage increase over the previous lease quantity. $ Inc. - A quantity increase over the previous lease quantity. Custom - Manually design the rent payment amounts by year. If Custom is chosen, the yearly lease payment quantities in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you select Custom and start to change the annual rent payment amounts in row 26, there is no other 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 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 separated into 3 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 in other words, a common direct cap assessment of a property financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived from renting the enhancements, exclusive 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 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 expense (i.e. before inflation). Retenanting might include basic leasing costs, it might include restoration and leasing, or it might consist of taking down the structure and restoring something new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth calculation. It is computed by taking the residential or commercial property value net of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you wish to customize the reversion worth.

Discount Rate - The discount rate at which to compute the present value of the ground lease capital. Consider this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section allows you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about acquiring a ground lease, it is within this section 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 cost, together with any other due diligence, closing, and pursuit expenses associated with the financial investment.

After going into the Ground Lease Investment Cost, the area determines 5 return metrics:
buyingland.com.au
- 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 based on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about purchasing a ground lease and intend to finance the purchase, it is within this section where you can get in the financial obligation assumptions, and see the corresponding return from that levered 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 design will determine the loan amount.
• Annual Rate Of Interest - 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 regular monthly or yearly.
  
  After going into the debt assumptions 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
  
  As with the unlevered analysis, the resulting returns are highly 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 model just permits debt 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 different information recognition lists are discovered. Unless you plan to modify the model, there is no factor to change the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I have actually created a short video that walks you through the various sections 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 available to everyone, it is used on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or maximum (your assistance assists keep the material coming - typical property appraisal designs offer for $100 - $300+ per license). Just get in a cost together with an e-mail address to send out the download link to, and after that 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 variation notes). Paid factors to the model get a new download link by means of email each time the design is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick 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 precise years of term staying.
• Updates to placeholder worths
  
  Version 2.31
  buyingland.com.au
  - Further modifications to logic 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 fix!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added extra notes under 'Flying start Guide' to clarify common 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 'Quick Start Guide' to provide a tutorial for using the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to permit for financier to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between valuation and 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 better separate 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 commercial real estate. He has 20+ years of CRE experience and has actually underwritten over $30 billion in genuine estate throughout leading institutional companies.