The subject of ground leases has shown up a number of times in the past couple of weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of creating an Advanced Concepts Module for our genuine estate 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.
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This design can be used standalone, or contributed to your existing property-level design. In any case, it is valuable for both landowners looking to size a ground lease payment or leasehold owners seeking to the worth of the leasehold (i.e. enhancements) relative to the cost simple interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the principles 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 financier rents the land (i.e. ground) just. In the case of a ground lease, typically one party owns the land (i.e. cost basic 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 improvements for an extended time period (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest describes a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the fee basic owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will typically own the enhancements 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 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 always wish to offer but where they may not have the know-how (or desire) to run. Thus, they lease the land to someone who owns and operates the improvements on the land, and get a ground lease payment in return. You see this rather typically with workplace 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 prefer to build and own their area however the developer doesn't always want to offer the land. So, the retail occupant will consent to rent the ground for 40+ years and build their own structure on the rented land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of tenants that often concur to this structure.

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

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 model to make it much easier to add a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a modification log for the design, in addition to discover crucial links related to the model.

The Ground Lease worksheet is separated into 7 sections as outlined and discussed listed below:

The Residential or commercial property Description section includes five inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 get in whether the step of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is common in property to append the name of the investment with (Ground Lease) to signify that the investment is for the fee 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 automatically be determined in cell E6. Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (i.e. the leasehold). The land is assumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate person or entity. So for example, you might be thinking about obtaining 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 overall rentable area of the building 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 are associated to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This must 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 beginning 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 determines the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to begin. This usually is equivalent to the Next Ground Lease Payment date, although the model was developed to enable 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 event you're evaluating a much shorter hold period, merely change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains the company terms of the ground lease, consisting of payment quantity, frequency, and rent increases. This area includes five inputs plus the option to manually design the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this quantity might be for an annual or regular monthly payment. Lease Increase Method - The technique used to design rent boosts. This can either be: None - No lease increases. % Inc. - A percentage boost over the previous rent amount. $ Inc. - A quantity boost over the previous lease quantity. Custom - Manually design the rent payment amounts by year. If Custom is selected, the annual rent payment amounts in row 26 become inputs for you to by hand alter (i.e. font turns blue). Important Note: If you choose Custom and begin 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) area where you compute the reversion value of the land (i.e. ground lease), the present 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 across the three 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 to put it simply, 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 stemmed from renting 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 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 simple leasing expenses, it may include restoration and leasing, or it may consist of tearing down the building and restoring something brand-new. The idea is to reach a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Each Year) - All of the above computations 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 worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth calculation. It is determined by taking the residential or commercial property worth web of any retenanting costs, and then growing it by a growth rate. The value is an optional input in case you desire to customize the reversion worth.

Discount Rate - The discount rate at which to calculate today worth of the ground lease cash flows. Think of 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 allows you to compute the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease, it is within this area 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 expense to obtain land with a ground lease. It must include the acquisition cost, together with any other due diligence, closing, and pursuit expenses related to the investment.

After getting in 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 highly dependent on the analysis period, 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 financial obligation) returns of a ground lease financial investment. If you are considering purchasing a ground lease and mean to finance the purchase, it is within this section where you can enter the debt assumptions, and see the corresponding return from that levered financial investment. The section consists of 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan amount.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently only enables for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or yearly.
  
  After entering the debt assumptions for the ground lease financial investment, the area computes 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 reliant on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will also heavily drive the levered return. And as a tip, in the meantime the design only 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 various data recognition lists are discovered. Unless you intend to modify the model, there is no reason to alter the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I've put together a brief video that walks 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 model available to everybody, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or maximum (your support assists keep the material coming - normal real estate appraisal models cost $100 - $300+ per license). Just get in a cost together with an e-mail address to send the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our models on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the model (see version notes). Paid contributors to the design receive a brand-new download link by means of email each time the model is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for enhanced 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 values
  
  Version 2.31
  
  - Further revisions to logic in I59
  
  Version 2.3
  
  - Fixed problem 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 resolve for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added additional notes under 'Quick Start Guide' to clarify common 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 improved 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 clarification purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to permit investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between evaluation 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 much better differentiate between Valuations areas and Investment Returns areas.
• Adjusted return formulas to make vibrant 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 genuine estate. He has 20+ years of CRE experience and has underwritten over $30 billion in real estate throughout leading institutional companies.