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The subject of has come up a number of times in the past few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the process of developing an Advanced Concepts Module for our real estate financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a good time to share my Ground Lease Valuation Model in Excel.
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This design can be utilized standalone, or contributed to your existing property-level model. Either way, it is valuable for both landowners wanting to size a ground lease payment or leasehold owners seeking to comprehend the worth of the leasehold (i.e. improvements) relative to the fee basic interest (i.e. land).

Excel model 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 meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor leases the land (i.e. ground) only. In the case of a ground lease, typically one celebration owns the land (i.e. fee simple interest) while a separate celebration owns the enhancements (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 specific or entity (lessee) rents the land (i.e. ground lease) from the charge basic owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will typically own the enhancements 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 lease to the lessor for usage of the land. At the end of the ground lease term, the lessee should return use of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners don't necessarily want to offer however where they might not have the competence (or desire) to operate. Thus, they lease the land to somebody who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this quite frequently with office complex in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, prominent retail tenants choose to build and own their space but the developer doesn't always want to sell the land. So, the retail renter will accept lease the ground for 40+ years and develop their own building on the leased land. Banks, national restaurants in outparcels, and large department shops are examples of tenants that frequently consent to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to manage 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 allow you to place this model into your own property-level model to make it much easier to include a ground lease element to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a change log for the design, in addition to find important links related to the design.

The Ground Lease worksheet is separated into seven sections as outlined and explained below:

The Residential or commercial property Description section consists of five inputs associated 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 is typical in genuine estate to add the name of the financial investment with (Ground Lease) to signify that the investment is for the fee easy 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 automatically be determined 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 presumed 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 circumstances, you might be thinking about acquiring the arrive at which a Target Superstore is developed. Target owns the building and is leasing the land for some prolonged period of time. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 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 started. This should 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 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 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 typically amounts to the Next Ground Lease Payment date, although the design 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 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 section includes business regards to the ground lease, consisting of payment amount, frequency, and rent increases. This area consists of five inputs plus the option to by hand design the rent payment quantities.

Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this quantity may be for an annual or month-to-month payment. Lease Increase Method - The method utilized to design rent boosts. This can either be: None - No rent increases. % Inc. - A percentage boost over the previous lease amount. $ Inc. - A quantity increase over the previous rent quantity. Custom - Manually design the lease payment amounts by year. If Custom is chosen, the annual lease payment quantities in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you pick Custom and start to alter the yearly rent 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 determine the reversion value of the land (i.e. ground lease), the present worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is broken up into 3 subsections, with 5 inputs and one optional input throughout 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 normal direct cap assessment 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 included. The concept being to reach 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 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 basic leasing costs, it might include renovation and leasing, or it may include taking apart the building and reconstructing something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above calculations 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 worth in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth calculation. It is determined by taking the residential or commercial property value net of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in the event you desire to customize the reversion value.

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

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area 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 matching returns from that financial investment. The area consists of just one input.

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

After getting in 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 based on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to determine 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 finance the purchase, it is within this area where you can enter the financial obligation assumptions, and see the matching return from that levered investment. The area includes three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan quantity.
• Annual Rates Of Interest - 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 month-to-month or annually.
  
  After getting in the debt presumptions for the ground lease financial 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
  
  Just like the unlevered analysis, the resulting returns are highly depending on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a suggestion, in the meantime the design just enables for financial obligation 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 validation lists are found. Unless you plan to customize the model, there is no factor to change 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 have actually assembled a short video that walks you through the different areas of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everyone, it is provided on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your support assists keep the content coming - common real estate evaluation designs offer for $100 - $300+ per license). Just go into a cost together with an email 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 designs on this basis, please connect to either Mike or Spencer.
  
  We routinely update the model (see version notes). Paid factors to the design get a brand-new download link by means of email each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying 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 reflect more precise years of term staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to logic in I59
  
  Version 2.3
  
  - Fixed concern 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 fix for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder values.
• Added additional notes under 'Quick Start Guide' to clarify common 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 improved user experience.
• Added a 'Quick 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' presumption to permit investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in between assessment 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 better differentiate in between Valuations areas and Investment Returns sections.
• 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 coworkers for commercial realty. He has 20+ years of CRE experience and has underwritten over $30 billion in property throughout top institutional companies.