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The topic of ground leases has actually turned up a number of 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 procedure of developing an Advanced Concepts Module for our real estate financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or added to your existing property-level design. Either method, it is valuable for both landowners aiming to size a ground lease payment or leasehold owners to comprehend the value of the leasehold (i.e. enhancements) relative to the fee easy interest (i.e. land).

Excel design for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown 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 party owns the land (i.e. charge simple interest) while a separate party owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the improvements for an extended duration of time (20 - 100 years)."

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

Ground leases prevail to prime locations, where landowners don't always desire to sell however where they may not have the knowledge (or desire) to operate. Thus, they rent the land to somebody who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this frequently with office complex in the downtown core of major cities.

Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, prominent retail renters prefer to construct and own their space but the designer does not necessarily wish to offer the land. So, the retail occupant will accept lease the ground for 40+ years and construct their own building on the leased land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of occupants that typically accept this structure.

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

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to permit you to place this model into your own property-level model to make it easier to include a ground lease part to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a change log for the model, along with discover important links connected to the design.

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

The Residential or commercial property Description area consists of five inputs related to the investment. These inputs are:

SF/M2 - In cell I3 go into whether the step of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is common in realty to add 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 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 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. enhancements) to be owned by a separate person or entity. So for circumstances, you might be considering getting the arrive at which a Target Superstore is constructed. Target owns the building and is leasing the land for some extended duration of time. The total rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of 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 began. 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 start through ground lease maturity. This is the overall length of the ground lease, not the number of years staying. The maximum length is 100 years. Based on the ground lease length, the model 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 normally amounts to the Next Ground Lease Payment date, although the design was built to enable 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 examining a shorter hold duration, simply change the orange font cell I17 to the preferred 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 increases. This section consists of five inputs plus the alternative to by hand design the rent payment amounts.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this amount might be for an annual or monthly payment. Lease Increase Method - The approach used to model rent increases. This can either be: None - No lease boosts. % Inc. - A portion boost over the previous lease quantity. $ Inc. - A quantity increase over the previous lease quantity. Custom - Manually model the lease payment amounts by year. If Custom is picked, the annual rent payment quantities in row 26 end up being inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you pick Custom and start to alter the annual lease 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 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 separated into 3 subsections, with five inputs and one optional input across the three subsections.

Ground Lease Reversion Value - Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap assessment of a real estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated 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 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 cost (i.e. before inflation). Retenanting might include basic leasing expenses, it might consist of restoration and leasing, or it may consist of taking apart the structure and rebuilding something brand-new. The concept is to come to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above estimations are done before accounting for 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)' used as the reversion value in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value computation. It is determined by taking the residential or commercial property value internet of any retenanting costs, and then growing it by a development rate. The worth is an optional input in the event you wish to personalize the reversion worth.

Discount Rate - The discount rate at which to compute the present worth of the ground lease capital. Consider this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area allows you to calculate the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about buying a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the corresponding returns from that financial investment. The section includes simply one input.

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

After going into the Ground Lease Investment Cost, the section calculates 5 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 reliant on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area permits you to compute the levered (i.e. with debt) 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 get in the financial obligation presumptions, and see the corresponding return from that levered 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 model will determine the loan quantity.
• Annual Interest Rate - The annual 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 monthly or yearly.
  
  After entering the debt presumptions 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 period, payment schedule, and reversion worth. The amount and rate of the debt will likewise greatly drive the levered return. And as a reminder, in the meantime the design only enables debt with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the various information validation lists are discovered. Unless you plan to customize the model, there is no reason to alter the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I've created a brief video that strolls you through the different areas 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 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 optimum (your support assists keep the content coming - common property appraisal models offer for $100 - $300+ per license). Just get in a rate together with an e-mail address to send the download link to, and then click 'Continue'. If you have any concerns about our "Pay What You're Able" program or why we use our designs on this basis, please connect to either Mike or Spencer.
  
  We routinely upgrade the design (see version notes). Paid contributors to the design get a brand-new download link through 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 information 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 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 fix!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added additional 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 improved user experience.
• Added a 'Quick Start Guide' to provide a tutorial for utilizing the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification functions.
• 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 much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 format to better separate between Valuations areas 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 genuine estate. He has 20+ years of CRE experience and has actually financed over $30 billion in real estate across top institutional companies.