The topic of ground leases has actually shown up numerous times in the past few weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the process of developing an Advanced Concepts Module for our realty financial 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.

This design can be utilized standalone, or contributed to your existing property-level model. In any case, it is practical for both landowners wanting to size a ground lease payment or leasehold owners aiming to understand the value of the leasehold (i.e. improvements) relative to the cost basic interest (i.e. land).
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Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the principles of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:

- "A lease structure where a genuine estate financier rents the land (i.e. ground) only. In the case of a ground lease, typically one celebration owns the land (i.e. fee easy interest) while a separate celebration owns the improvements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for a prolonged amount of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the cost easy owner (lessor) of the land for an extended duration of time. The lessee of a leasehold estate will normally 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 use 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 are common to prime locations, where landowners don't always wish to sell however where they may not have the competence (or desire) to operate. Thus, they rent the land to somebody who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this rather frequently with workplace structures in the downtown core of significant cities.

Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, popular retail renters choose to develop and own their space however the developer does not always wish to offer the land. So, the retail renter will consent to rent the ground for 40+ years and construct their own building on the rented land. Banks, nationwide restaurants in outparcels, and big department stores are examples of renters that often consent to this structure.

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

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to permit you to insert this model into your own property-level model to make it simpler to include a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can view a modification log for the model, along with discover essential links related to the model.

The Ground Lease worksheet is broken up into seven areas as described and explained below:

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

SF/M2 - In cell I3 go into whether the step of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in genuine estate to append the name of the investment with (Ground Lease) to denote that the investment is for the charge simple 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 instantly be determined 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 example, you may be thinking about obtaining the land on which a Target Superstore is built. Target owns the structure and is leasing the land for some prolonged period of time. The overall rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of 4 required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and financial 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 commencement 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 on the ground lease length, the model 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 equal to the Next Ground Lease Payment date, although the model was built to permit 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 period, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes the business terms of the ground lease, consisting of payment amount, frequency, and lease boosts. This section includes five inputs plus the choice to by hand design the lease payment quantities.

Initial Payment Amount - The quantity 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 utilized to model rent increases. This can either be: None - No lease increases. % Inc. - A portion boost over the previous rent quantity. $ Inc. - A quantity boost over the previous lease quantity. Custom - Manually model the rent payment quantities by year. If Custom is picked, the yearly rent payment amounts in row 26 become inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you pick Custom and start 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 compute the reversion value 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 area is separated into 3 subsections, with five inputs and one optional input throughout the 3 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 typical direct cap assessment of a real estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings originated from leasing the enhancements, special 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 come to a value 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 get back 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 include easy leasing costs, it might include restoration and leasing, or it might consist of tearing down the building and rebuilding something new. The idea is to come to a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Each Year) - All of the above calculations are done before accounting for inflation (i.e. growth). 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 computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth calculation. It is calculated by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in the event you wish to customize the reversion worth.

Discount Rate - The discount rate at which to compute the present worth of the ground lease money circulations. Consider 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) section permits you to determine the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are thinking about purchasing 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 get land with a ground lease. It should include the acquisition cost, together with any other due diligence, closing, and pursuit costs associated with the financial investment.

After entering the Ground Lease Investment Cost, the area computes 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 based on the analysis period, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering purchasing a ground lease and mean to fund the purchase, it is within this section where you can get in the debt assumptions, and see the matching 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 design will compute the loan quantity.
• Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or every year.
  
  After entering the financial obligation presumptions for the ground lease investment, the section calculates five 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 highly reliant on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise greatly drive the levered return. And as a suggestion, in the meantime the design just enables financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final section is where backend inputs utilized in the different information recognition lists are discovered. Unless you intend to customize the model, there is no factor to change the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I've assembled a short video that walks you through the different sections of the design. Note that this video is based upon v1.0 of the design.
  
  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 (go into $0 if you 'd like) or optimum (your assistance helps keep the material coming - typical property valuation models cost $100 - $300+ per license). Just enter 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 provide our designs on this basis, please connect to either Mike or Spencer.
  
  We regularly update the model (see variation notes). Paid contributors to the design get a new download link by means of e-mail each time the model is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for improved readability
• Updates to placeholder worths
• 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 staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to reasoning in I59
  
  Version 2.3
  
  - Fixed concern where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to resolve for concern 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 worths.
• Added additional notes under 'Flying 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 enhanced user experience.
• Added a 'Flying Start Guide' to provide a tutorial for utilizing the design.
• 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 allow for investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish between evaluation 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 much better differentiate between Valuations sections and Investment Returns areas.
• Adjusted return solutions 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 financed over $30 billion in genuine estate throughout leading institutional companies.