merriam-webster.com
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 for a purpose-built Ground Lease Valuation Model. And I'm in the process of producing an Advanced Concepts Module for our realty monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be an excellent time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or included to your existing property-level model. In either case, it is handy for both landowners looking to size a ground lease payment or leasehold owners seeking to understand the worth of the leasehold (i.e. improvements) to the cost simple interest (i.e. land).

Excel design for assessing 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 definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where a genuine estate investor leases the land (i.e. ground) just. When it comes to a ground lease, typically one celebration owns the land (i.e. cost easy interest) while a different celebration owns the enhancements (i.e. leasehold interest). In a lot of cases, the owner of the land leases the land to the owner of the enhancements for a prolonged amount 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 cost simple owner (lessor) of the land for an extended period of time. The lessee of a leasehold estate will typically 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 use 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 prevail to prime locations, where landowners don't necessarily wish to sell however where they may not have the expertise (or desire) to operate. Thus, they lease the land to someone who owns and runs the improvements on the land, and get 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 remain in retail shopping mall. Oftentimes, popular retail occupants choose to develop and own their area however the developer doesn't always want to offer the land. So, the retail occupant will agree to lease the ground for 40+ years and develop their own structure on the rented land. Banks, nationwide dining establishments in outparcels, and large outlet store are examples of renters that typically consent 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 areas of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to enable 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 performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a change log for the design, along with discover important links associated with the model.

The Ground Lease worksheet is broken up into 7 sections as laid out and discussed listed below:

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

SF/M2 - In cell I3 enter whether the measure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It prevails in realty to add the name of the financial investment with (Ground Lease) to signify that the financial investment is for the charge basic 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 calculated 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for example, you might be thinking about getting the arrive at which a Target Superstore is constructed. Target owns the building and is renting the land for some extended time period. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of four required inputs and one optional inputs. These inputs are related to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease began. This ought to 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 overall length of the ground lease, not the number of years remaining. The optimum length is 100 years. Based upon 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 start. This usually is equal to the Next Ground Lease Payment date, although the model was constructed 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 case you're evaluating a shorter hold period, just 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 regards to the ground lease, including payment quantity, frequency, and rent increases. This section consists of 5 inputs plus the option to by hand design the rent payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity may be for an annual or regular monthly payment. Lease Increase Method - The technique utilized to model rent increases. This can either be: None - No lease boosts. % Inc. - A portion boost over the previous rent quantity. $ Inc. - An amount increase over the previous lease quantity. Custom - Manually model the lease payment amounts by year. If Custom is picked, the yearly rent payment quantities in row 26 end up being inputs for you to manually alter (i.e. typeface turns blue). Important Note: If you choose Custom and begin to change the yearly lease payment quantities in row 26, there is no 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 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 three subsections, with five inputs and one optional input across the 3 subsections.

Ground Lease Reversion Value - Within this subsection you model the worth of the residential or commercial property as if there was no ground lease. Or simply put, a typical direct cap valuation of a genuine estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated from leasing 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 consisted of. The idea being to get to a worth 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 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 expense (i.e. before inflation). Retenanting might include easy leasing expenses, it might consist of restoration and leasing, or it may consist of tearing down the building and reconstructing something new. The idea is to come to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. development). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value estimation. 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 occasion you want to tailor the reversion value.

Discount Rate - The discount rate at which to compute today worth 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) section allows you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering purchasing a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the corresponding returns from that investment. The section consists of simply one input.

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

After going into 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 highly depending on the analysis period, payment schedule, and reversion worth.
  
  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 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 presumptions, and see the matching return from that levered investment. The area includes 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan amount.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model currently only permits for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.
  
  After going into the debt assumptions for the ground lease investment, the area determines 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 extremely depending on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will also greatly drive the levered return. And as a pointer, for now the model just enables debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the numerous information recognition lists are found. Unless you plan to modify the model, there is no reason to alter the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I've put together a short video that strolls you through the numerous 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 model available to everyone, it is used on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance assists keep the material coming - common genuine estate valuation models offer for $100 - $300+ per license). Just enter a cost together with an e-mail address to send out 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 connect to either Mike or Spencer.
  
  We frequently upgrade the model (see variation notes). Paid contributors to the model receive a brand-new download link through e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick Start Guide' with updates and for enhanced 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 staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing 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 repair!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added additional notes under 'Quick Start Guide' to clarify typical confusion around start dates for various 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 offer a tutorial for using the model.
• 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 financier 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 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 in between Valuations sections 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 coworkers for industrial realty. He has 20+ years of CRE experience and has financed over $30 billion in realty throughout leading institutional firms.