The subject of ground leases has come 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 remain in the process of developing an Advanced Concepts Module for our property monetary modeling Accelerator program covering the mechanics of 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 design. Either way, it is helpful for both landowners aiming to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. improvements) relative to the charge simple interest (i.e. land).

Excel design for assessing a ground lease
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What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the ideas 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 an investor rents the land (i.e. ground) only. When it comes to a ground lease, normally one celebration owns the land (i.e. cost easy interest) while a different party owns the improvements (i.e. leasehold interest). In the majority of cases, the owner of the land leases the land to the owner of the enhancements for a prolonged period of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the charge simple owner (lessor) of the land for a prolonged period of time. The lessee of a leasehold estate will generally own the improvements on the land and utilize 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 rent to the lessor for usage of the land. At the end of the ground lease term, the lessee must return use of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners don't necessarily desire to offer however where they may not have the competence (or desire) to operate. Thus, they lease the land to somebody who owns and runs the enhancements on the land, and get a ground lease payment in return. You see this quite typically with workplace buildings in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, prominent retail tenants prefer to construct and own their space however the developer doesn't necessarily want to sell the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own structure on the leased land. Banks, national restaurants in outparcels, and large department stores are examples of renters that typically accept this structure.

Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling project.

How to Use the Ground Lease Valuation Model

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

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the model, along with find important links related to the design.

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

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

SF/M2 - In cell I3 go into whether the procedure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is common in realty to append the name of the financial investment with (Ground Lease) to denote that the investment is for the fee 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 improvements (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 different person or entity. So for example, you might be considering acquiring the arrive at which a Target Superstore is developed. Target owns the structure and is renting the land for some extended amount 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 includes four needed 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 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 model then determines 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 allow 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 the event you're examining a much shorter hold period, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of the company terms of the ground lease, consisting of payment amount, frequency, and rent increases. This section includes 5 inputs plus the choice to by hand design the rent payment amounts.

Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see below), this quantity may be for a yearly or monthly payment. Lease Increase Method - The method utilized to model rent increases. This can either be: None - No lease increases. % Inc. - A portion increase over the previous lease quantity. $ Inc. - An amount increase over the previous lease quantity. Custom - Manually model the rent payment amounts by year. If Custom is chosen, the annual rent payment quantities in row 26 become inputs for you to manually change (i.e. typeface turns blue). Important Note: If you pick Custom and start to change the annual rent payment amounts 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 worth of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is broken up into three subsections, with 5 inputs and one optional input throughout 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 to put it simply, a common direct cap evaluation of a property investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings stemmed from renting 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 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 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 expenses, it might include restoration and leasing, or it may consist of tearing down the building and rebuilding something brand-new. The concept is to come to 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. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to arrive at a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present worth calculation. 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 web of any retenanting expenses, and then growing it by a development rate. The worth is an optional input in case you wish to tailor the reversion value.

Discount Rate - The discount rate at which to determine today worth of the ground lease money circulations. Think of this discount rate as an obstacle rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section allows you to determine the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering acquiring 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 consists of just one input.

Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It must consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses associated with the financial investment.

After going into the Ground Lease Investment Cost, the area 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 depending on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area allows you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about buying a ground lease and plan to fund the purchase, it is within this area where you can enter the financial obligation assumptions, and see the corresponding return from that levered investment. The section includes three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan quantity.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the model presently just enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or every year.
  
  After getting in the debt presumptions for the ground lease financial investment, the section computes 5 return metrics:
  
  - - Levered Internal Rate of Return
• Levered Equity Multiple
• Net Profit
• Average Rate of Return
• Average Cash-on-Cash Return
  
  Similar to the unlevered analysis, the resulting returns are highly dependent on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will likewise greatly drive the levered return. And as a tip, in the meantime the model just permits debt with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs utilized in the different data validation lists are discovered. Unless you mean to modify the design, there is no reason to change the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I have actually created a short video that walks you through the different areas 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 accessible to everybody, it is offered on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your assistance helps keep the material coming - normal genuine estate appraisal designs offer for $100 - $300+ per license). Just go into a price together with an e-mail address to send out the download link to, and after that click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we use our models on this basis, please connect to either Mike or Spencer.
  
  We frequently upgrade the design (see version notes). Paid contributors to the model receive a new download link via e-mail each time the model is updated.
  
  Version Notes
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  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for improved readability
• Updates to placeholder values
• Fix to misspelled word on Version tab
  
  Version 2.32
  
  - Removed redundant information in E17: G17.
• Updated I22 to show more precise years of term remaining.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  
  - Fixed issue where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing out on the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to solve for issue 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 worths.
• Added additional notes under 'Flying start Guide' to clarify typical 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 'Quick Start Guide' to offer 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' assumption to permit investor to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in 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 separate in between Valuations sections and Investment Returns sections.
• 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 realty. He has 20+ years of CRE experience and has actually financed over $30 billion in realty throughout leading institutional companies.