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The subject of ground leases has turned up several times in the past few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the procedure 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 good time to share my Ground Lease Model in Excel.
This model can be utilized standalone, or contributed to your existing property-level model. In any case, it is useful for both landowners seeking to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. improvements) 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 unknown with the ideas of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:
Ground lease - "A lease structure where a genuine estate financier leases the land (i.e. ground) just. When it comes to a ground lease, normally one celebration owns the land (i.e. fee simple interest) while a separate celebration owns the enhancements (i.e. leasehold interest). In most cases, the owner of the land rents the land to the owner of the improvements for a prolonged period of time (20 - 100 years)."
Leasehold Interest - "In property, a leasehold interest describes a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the fee simple owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will usually own the enhancements on the land and use the land and improvements 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 usage of the land. At the end of the ground lease term, the lessee should return usage of the land, and any improvements thereon, to the land owner.
Ground leases are typical to prime areas, 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 somebody who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of significant cities.
Another case where you'll encounter ground leases are in retail shopping centers. Oftentimes, popular retail tenants prefer to build and own their space however the designer does not necessarily wish to sell the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own structure on the rented land. Banks, national restaurants in outparcels, and large outlet store are examples of renters that frequently agree to this structure.
Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling job.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to permit you to place this design into your own property-level design to make it simpler 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 included where you can see a modification log for the model, along with find crucial links related to the design.
The Ground Lease worksheet is separated into 7 sections as described and described below:
The Residential or commercial property Description area includes 5 inputs associated to the 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 prevails in real estate to append the name of the financial investment with (Ground Lease) to represent that the investment is for the charge basic 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 instantly 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 separate person or entity. So for circumstances, you may be thinking about acquiring the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some extended period 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 section includes four required 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 began. This should 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 optimum length is 100 years. Based on the ground lease length, the model 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 amounts to the Next Ground Lease Payment date, although the model was developed to allow 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 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 area contains the company terms of the ground lease, consisting of payment amount, frequency, and rent boosts. This section includes 5 inputs plus the option to by hand model 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 may be for a yearly or month-to-month payment.
Lease Increase Method - The method used to model lease boosts. This can either be: None - No lease boosts.
% Inc. - A percentage increase over the previous lease amount.
$ Inc. - A quantity increase over the previous lease quantity.
Custom - Manually design the lease payment amounts by year. If Custom is picked, the yearly 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 start to change the annual lease payment quantities in row 26, there is no method to revert back to another Lease Increase Method.
Section 3 - Ground Lease Terms
It is within the Valuation (Fee and Leasehold) area where you calculate the reversion value 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 three subsections, with 5 inputs and one optional input across 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 typical direct cap evaluation of a realty financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings stemmed from leasing 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 idea being to reach 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 enhancements 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 may consist of basic leasing costs, it may consist of restoration and leasing, or it may consist of tearing down the building and restoring something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get here at a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present value estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value calculation. It is calculated by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in case you desire to tailor the reversion value.
Discount Rate - The discount rate at which to calculate today value of the ground lease capital. Consider this discount rate as a difficulty 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 compute the unlevered (i.e. before financial obligation) 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 investment. The section consists of just one input.
Ground Lease Investment Cost - This is the expense to get land with a ground lease. It should include the acquisition expense, together with any other due diligence, closing, and pursuit costs associated with the investment.
After going into the Ground Lease Investment Cost, the section determines 5 return metrics:
- Unlevered Internal Rate of Return
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