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The topic of ground leases has actually turned up numerous times in the past couple of weeks. Numerous A.CRE readers have actually emailed to request for a Lease Valuation Model. And I'm in the procedure 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.

This design can be utilized standalone, or contributed to your existing property-level model. Either way, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners aiming to understand the value of the leasehold (i.e. enhancements) relative to the cost easy interest (i.e. land).

Excel model for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the concepts 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 financier leases the land (i.e. ground) just. When it comes to a ground lease, usually one party owns the land (i.e. charge simple interest) while a separate party owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land leases the land to the owner of the enhancements for an extended amount of time (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 charge basic owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will usually own the enhancements on the land and utilize the land and enhancements as if the lessee were the owner of the land. During the regard to 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 needs to return use of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime places, where landowners don't necessarily desire to sell however where they might not have the competence (or desire) to operate. Thus, they rent the land to someone who owns and runs the improvements on the land, and get a ground lease payment in return. You see this frequently 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 renters prefer to develop and own their space however the developer does not always wish to sell the land. So, the retail tenant will concur to rent the ground for 40+ years and build their own structure on the rented land. Banks, nationwide dining establishments in outparcels, and big outlet store are examples of renters that frequently agree to this structure.

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

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to enable you to insert this design into your own property-level design to make it simpler to add a ground lease component 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 modification log for the design, as well as discover crucial links related to the model.

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

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

SF/M2 - In cell I3 enter 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 real estate to append the name of the financial investment with (Ground Lease) to represent 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 calculated in cell E6. Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical enhancements (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 separate individual or entity. So for circumstances, you might be considering obtaining the arrive at which a Target Superstore is developed. Target owns the building and is renting the land for some extended duration 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 section includes four required inputs and one optional inputs. These inputs are related to the chronology of the ground lease and financial 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 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 commencement through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The optimum 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 usually is equivalent to the Next Ground Lease Payment date, although the model was developed 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 the event you're evaluating a much shorter hold period, simply change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of business terms of the ground lease, including payment amount, frequency, and lease boosts. This area includes 5 inputs plus the choice to manually model the lease payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see below), this quantity may be for a yearly or month-to-month payment. Lease Increase Method - The method used to design rent increases. This can either be: None - No lease boosts. % Inc. - A percentage increase over the previous rent quantity. $ Inc. - A quantity boost over the previous rent amount. Custom - Manually design the lease payment quantities by year. If Custom is selected, the yearly lease payment amounts in row 26 become inputs for you to by hand alter (i.e. font turns blue). Important Note: If you select Custom and start to change the annual rent payment amounts 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 calculate the reversion value of the land (i.e. ground lease), the present worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is separated into three subsections, with 5 inputs and one optional input across the 3 subsections.

Ground Lease Reversion Value - Within this subsection you model the value of the residential or commercial property as if there was no ground lease. Or simply put, a typical direct cap evaluation of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated from leasing the enhancements, unique 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 come to 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 return the land plus any improvements 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 might include easy leasing costs, it may include renovation and leasing, or it may include taking down the structure and rebuilding something brand-new. The idea is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Per Year) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get here 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 value utilized in the ground lease present worth computation. It is calculated by taking the residential or commercial property value internet of any retenanting costs, and then growing it by a growth rate. The value is an optional input in the occasion you wish to personalize the reversion worth.

Discount Rate - The discount rate at which to calculate the present worth 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 allows you to compute the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering buying 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 includes simply one input.

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

After getting in the Ground Lease Investment Cost, the area 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 duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to determine the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering purchasing a ground lease and intend to finance the purchase, it is within this section where you can enter the debt presumptions, and see the corresponding return from that levered investment. The area consists of three 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 model currently only enables for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
  
  After getting in the financial obligation presumptions for the ground lease investment, the area computes 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 depending on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will likewise heavily drive the levered return. And as a suggestion, for now the model only 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 different data recognition lists are discovered. Unless you mean to modify the model, there is no reason to alter the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually assembled a brief video that strolls you through the different areas 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 accessible to everyone, it is used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance helps keep the material coming - normal property evaluation designs cost $100 - $300+ per license). Just go into a rate together with an email address to send the download link to, and after that click 'Continue'. If you have any concerns about our "Pay What You're Able" program or why we offer our designs on this basis, please connect to either Mike or Spencer.
  
  We regularly upgrade the design (see version notes). Paid contributors to the model get a brand-new download link by means of email each time the design is upgraded.
  
  Version Notes
  
  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 details 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 out on the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to resolve for problem 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 different 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 provide a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable for investor to examine 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 in between Valuations areas and Investment Returns sections.
• Adjusted return solutions 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 coworkers for commercial realty. He has 20+ years of CRE experience and has financed over $30 billion in realty throughout top institutional companies.
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