The subject of ground leases has actually turned up a number of times in the previous 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 realty monetary modeling Accelerator program covering the mechanics of leases. So I thought now would be a good time to share my Ground Lease Valuation Model in Excel.

This design can be utilized standalone, or added to your existing property-level design. In either 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 fee basic interest (i.e. land).
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Excel design 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 a real estate investor rents the land (i.e. ground) only. In the case of a ground lease, typically one celebration owns the land (i.e. cost easy interest) while a different celebration owns the improvements (i.e. leasehold interest). In a lot of cases, the owner of the land rents the land to the owner of the improvements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the cost basic owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will normally own the improvements on the land and utilize 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 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 necessarily want to sell but where they may not have the know-how (or desire) to run. 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 rather typically 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 renters prefer to develop and own their area but the designer does not always wish to sell the land. So, the retail occupant will consent to rent the ground for 40+ years and develop their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big department shops are examples of occupants that frequently agree to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing 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 place this design into your own property-level design to make it much easier to include a ground lease part 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 crucial links associated with the model.

The Ground Lease worksheet is separated into seven sections as described and discussed below:

The Residential or commercial property Description area includes 5 inputs associated to the investment. These inputs are:

SF/M2 - In cell I3 enter 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 denote that the financial investment is for the charge simple 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 immediately be computed 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 individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for example, you might be thinking about getting the arrive on which a Target Superstore is constructed. Target owns the structure and is leasing the land for some extended time period. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 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 beginning through ground lease maturity. This is the total length of the ground lease, not the variety of years remaining. The maximum length is 100 years. Based upon 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 usually amounts to the Next Ground Lease Payment date, although the model was developed to permit 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 occasion you're examining a shorter hold period, merely change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains business regards to the ground lease, consisting of payment amount, frequency, and lease boosts. This area consists of 5 inputs plus the option to by hand design the rent payment amounts.

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 regular monthly payment. Lease Increase Method - The technique used to model rent boosts. This can either be: None - No lease boosts. % Inc. - A portion increase over the previous lease quantity. $ Inc. - An amount increase over the previous lease amount. Custom - Manually design the rent payment quantities by year. If Custom is selected, the annual lease payment quantities in row 26 become inputs for you to manually alter (i.e. font turns blue). Important Note: If you select Custom and begin to alter 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) section where you calculate 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 three 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 in other words, a typical direct cap appraisal of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated 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 get to 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 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 may consist of basic leasing expenses, it may consist of renovation and leasing, or it may consist of taking apart the building and reconstructing something new. The concept is to show up at a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Each 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 show up at a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present value computation. It is calculated by taking the residential or commercial property value internet of any retenanting expenses, and after that growing it by a development rate. The worth is an optional input in case you wish to personalize the reversion worth.

Discount Rate - The discount rate at which to determine today worth of the ground lease cash circulations. Think about this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area permits you to determine the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering purchasing a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the corresponding returns from that investment. The section consists of 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 connected to the investment.

After going into the Ground Lease Investment Cost, the section 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 extremely based on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease and intend to fund the purchase, it is within this section where you can go into the debt presumptions, and see the matching 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 calculate the loan quantity.
• Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model currently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.
  
  After going into the financial obligation assumptions for the ground lease investment, the section 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 dependent on the analysis duration, payment schedule, and reversion value. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a suggestion, for now the design just enables financial obligation with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final section is where backend inputs used in the different data recognition lists are found. Unless you plan to modify the design, there is no reason to change the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I've created a brief video that walks you through the numerous sections of the model. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design available to everybody, it is provided 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 - normal realty assessment designs cost $100 - $300+ per license). Just get in a cost 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 reach out to either Mike or Spencer.
  
  We routinely update the design (see variation notes). Paid contributors to the design get a new download link via 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 details in E17: G17.
• Updated I22 to reflect more accurate years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to reasoning 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 fix for problem 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 values.
• Added additional notes under 'Quick Start Guide' to clarify common 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 'Flying Start Guide' to supply a tutorial for using the design.
• 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' presumption to permit financier to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 formatting to better separate 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 commercial property. He has 20+ years of CRE experience and has underwritten over $30 billion in property across leading institutional firms.