The subject of ground leases has actually shown up numerous times in the past few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the process of developing an Advanced Concepts Module for our property monetary modeling Accelerator program covering the mechanics of leases. So I thought now would be a great time to share my Ground Lease Valuation Model in Excel.
temporaerhaus.de
This design can be used standalone, or added 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 wanting to comprehend the value of the leasehold (i.e. enhancements) relative to the cost simple interest (i.e. land).

Excel model for examining 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 meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor rents the land (i.e. ground) just. In the case of a ground lease, usually one celebration owns the land (i.e. fee simple interest) while a separate party owns the improvements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the enhancements 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) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will typically 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 use of the land. At the end of the ground lease term, the lessee must return use of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime locations, where landowners do not necessarily wish to sell but where they might not have the competence (or desire) to operate. Thus, they lease the land to somebody who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this rather frequently with office complex in the downtown core of major cities.

Another case where you'll face ground leases are in retail shopping centers. Oftentimes, prominent retail renters choose to develop and own their area but the designer does not necessarily wish to offer the land. So, the retail renter will consent to lease the ground for 40+ years and build their own building on the leased land. Banks, nationwide dining establishments in outparcels, and large department stores are examples of tenants that frequently accept this structure.

Quick Note: Not thinking about 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 deliberate to allow you to place this model into your own property-level design to make it much 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, along with find crucial links associated with the design.

The Ground Lease worksheet is broken up into 7 sections as outlined and discussed 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 get in whether the procedure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It prevails in property to append the name of the financial investment with (Ground Lease) to represent 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 country. Land Size - Total SF or M2 of land. The variety of acres or hectares will than automatically be computed in cell E6. Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different individual or entity. So for circumstances, you might be thinking about acquiring the land on which a Target Superstore is constructed. Target owns the building and is renting the land for some extended amount of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of four required inputs and one optional inputs. These inputs are related 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 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 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 on the ground lease length, the design then calculates the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to begin. This typically is equivalent to the Next Ground Lease Payment date, although the design was built to permit 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 analyzing a shorter hold duration, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains business regards to the ground lease, consisting of payment amount, frequency, and rent increases. This area consists of 5 inputs plus the alternative to manually design the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this quantity might be for an annual or regular monthly payment. Lease Increase Method - The method utilized to design lease boosts. This can either be: None - No lease increases. % Inc. - A percentage boost over the previous lease amount. $ Inc. - A quantity boost over the previous rent quantity. Custom - Manually model the rent payment amounts by year. If Custom is selected, the annual rent payment amounts in row 26 end up being inputs for you to manually alter (i.e. typeface turns blue). Important Note: If you select Custom and begin to change the yearly lease 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) section where you calculate the reversion worth 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 section is separated into 3 subsections, with 5 inputs and one optional input throughout the 3 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 simply put, a common direct cap valuation of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived from renting the enhancements, unique 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 idea being to get here 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 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 simple leasing expenses, it may consist of renovation and leasing, or it may consist of taking apart the structure and reconstructing something new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Annually) - All of the above estimations are done before representing 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 value in the ground lease present worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value computation. It is determined by taking the residential or commercial property worth net of any retenanting costs, and after that growing it by a growth rate. The value is an optional input in the occasion you desire to personalize 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 an obstacle rate (i.e. necessary rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area enables 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 corresponding returns from that financial investment. The section includes just one input.

Ground Lease Investment Cost - This is the cost to obtain land with a ground lease. It ought to include the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the investment.

After going into the Ground Lease Investment Cost, the area calculates 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 extremely based on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and intend to fund the purchase, it is within this section where you can get in the financial obligation assumptions, and see the matching 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 design will determine the loan quantity.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
  
  After getting in the debt assumptions for the ground lease financial investment, the area calculates 5 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 duration, payment schedule, and reversion worth. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a tip, for now the model only enables for financial obligation 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 information recognition lists are discovered. Unless you intend to modify 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 written guidance above, I've assembled a short 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 design accessible to everyone, 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 - common realty assessment models cost $100 - $300+ per license). Just get in a price together with an e-mail address to send 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 models on this basis, please reach out to either Mike or Spencer.
  
  We regularly upgrade the model (see variation notes). Paid factors to the design get a brand-new download link by means of email each time the model is updated.
  
  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 show more accurate years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to reasoning 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 worths
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for different areas.
• 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 offer a tutorial for using 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' assumption to permit investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 better separate in between Valuations sections and Investment Returns areas.
• Adjusted return formulas to make vibrant to Investment Hold Period
  
  Version 1.0
  freakshow.fm
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for business real estate. He has 20+ years of CRE experience and has financed over $30 billion in genuine estate across top institutional companies.