The subject of ground leases has actually turned up several times in the past couple of weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of producing 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 model can be utilized standalone, or contributed to your existing property-level design. Either way, it is practical for both landowners looking to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. improvements) relative to the cost easy interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the principles of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:

- "A lease structure where a genuine estate investor leases the land (i.e. ground) just. In the case of a ground lease, normally one party owns the land (i.e. charge simple interest) while a separate party owns the improvements (i.e. leasehold interest). In a lot of cases, the owner of the land rents the land to the owner of the improvements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the fee easy owner (lessor) of the land for an extended amount of time. 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 use of the land. At the end of the ground lease term, the lessee must return usage of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime locations, where landowners do not necessarily wish to sell 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 on a regular basis with office complex in the downtown core of major 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 but the designer does not always wish to sell the land. So, the retail tenant will concur to rent the ground for 40+ years and construct their own structure on the leased land. Banks, nationwide restaurants in outparcels, and big department shops are examples of renters that often accept this structure.

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

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to enable you to place this design into your own property-level model to make it 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 also included where you can see a change log for the model, along with find important links related to the model.

The Ground Lease worksheet is broken up into 7 areas as outlined and discussed listed below:

The Residential or commercial property Description section includes 5 inputs related to the investment. These inputs are:

SF/M2 - In cell I3 enter whether the step of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It prevails in property to append the name of the investment with (Ground Lease) to represent that the financial 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 computed 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 person or entity, and the leasehold interest (i.e. enhancements) to be owned by a different person or entity. So for example, you may be considering getting the land on which a Target Superstore is constructed. Target owns the structure and is renting the land for some prolonged time period. The total rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

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

Ground Lease Start Date - The month and year when the ground lease commenced. This need to 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 beginning through ground lease maturity. This is the overall length of the ground lease, not the variety of years staying. The maximum length is 100 years. Based on the ground lease length, the design 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 is equal to the Next Ground Lease Payment date, although the model was developed to permit 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 case you're analyzing a much 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 business terms of the ground lease, consisting of payment amount, frequency, and rent increases. This area includes five inputs plus the alternative to manually model the rent payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see below), this amount may be for a yearly or regular monthly payment. Lease Increase Method - The approach utilized to design rent boosts. This can either be: None - No rent increases. % Inc. - A percentage increase over the previous rent quantity. $ Inc. - An amount increase over the previous lease amount. 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 manually change (i.e. font style turns blue). Important Note: If you select Custom and start to alter the annual rent 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) section 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 worth of the leasehold interest. This section is broken up into three subsections, with five inputs and one optional input throughout the three 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 normal direct cap appraisal of a property financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived from renting the improvements, 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 come 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 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 expense (i.e. before inflation). Retenanting might consist of basic leasing expenses, it might consist of restoration and leasing, or it might include taking apart the structure and rebuilding something new. The idea is to show up at a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Annually) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to show up at a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value estimation. It is calculated by taking the residential or commercial property worth internet of any retenanting costs, and then growing it by a development rate. The value is an optional input in the event you want to personalize the reversion value.

Discount Rate - The discount rate at which to calculate the present value of the ground lease capital. Think about this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area permits you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering purchasing 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 area includes simply one input.

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

After getting in the Ground Lease Investment Cost, the section calculates 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 reliant on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area allows you to determine the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering buying a ground lease and plan to finance the purchase, it is within this area where you can go into the financial obligation presumptions, and see the corresponding return from that levered investment. The section includes 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan amount.
• Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently only permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.
  
  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
  
  Just like the unlevered analysis, the resulting returns are highly based on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a suggestion, in the meantime the model just allows for 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 numerous data recognition lists are discovered. Unless you intend to modify the model, there is no reason to change the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I've put together a short video that strolls you through the various sections 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 available to everyone, it is used on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your assistance helps keep the content coming - common property evaluation models offer for $100 - $300+ per license). Just enter a price 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 provide our models on this basis, please connect to either Mike or Spencer.
  
  We regularly upgrade 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 upgraded.
  
  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 precise years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  faqtoids.com
  - Fixed issue 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 issue 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 values.
• Added additional notes under 'Flying 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 'Flying Start Guide' to supply a tutorial for using 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' assumption to enable investor to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between assessment and investment returns.
• Renamed 'Analysis Start Date' to 'Valuation Start Date', 'Analysis Period' to 'Valuation Period', and 'Analysis End' to 'Valuation End'.
• Updated heading format to much better separate between Valuations areas and Investment Returns areas.
• 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 business realty. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate across leading institutional companies.