The topic of ground leases has shown up several times in the past few weeks. Numerous A.CRE readers have actually to request for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of creating an Advanced Concepts Module for our genuine estate monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great time to share my Ground Lease Valuation Model in Excel.
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This model can be used standalone, or included to your existing property-level design. In either case, it is practical for both landowners seeking to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. enhancements) relative to the charge easy interest (i.e. land).

Excel model for evaluating 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 rents the land (i.e. ground) only. When it comes to a ground lease, typically one celebration owns the land (i.e. charge easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the improvements for an extended period of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the fee basic owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will usually own the enhancements on the land and use 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 use of the land. At the end of the ground lease term, the lessee should return usage of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime locations, where landowners don't necessarily wish to sell however where they might not have the expertise (or desire) to operate. Thus, they rent the land to somebody who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this frequently with workplace structures in the downtown core of major cities.

Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, popular retail tenants prefer to build and own their space but the designer does not always want to sell the land. So, the retail renter will concur to rent the ground for 40+ years and build their own structure on the leased land. Banks, national restaurants in outparcels, and large department shops are examples of renters that frequently agree to this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling job.

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 model into your own property-level design to make it easier to add a ground lease part 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, as well as discover essential links associated with the design.

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

The Residential or commercial property Description section includes five inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 enter 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 represent 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 number of acres or hectares will than instantly 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. improvements) to be owned by a separate individual or entity. So for example, you may be thinking about obtaining the arrive at which a Target Superstore is built. Target owns the structure and is leasing the land for some prolonged amount of time. The total rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of four needed inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This need 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 start through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The maximum length is 100 years. Based on the ground lease length, the model 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 normally amounts to the Next Ground Lease Payment date, although the design was built to enable for 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 evaluating a shorter hold period, merely 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 quantity, frequency, and rent boosts. This area consists of five inputs plus the option to by hand model the rent payment amounts.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this quantity may be for an annual or month-to-month payment. Lease Increase Method - The method used to model lease boosts. This can either be: None - No rent boosts. % Inc. - A percentage increase over the previous lease amount. $ Inc. - An amount increase over the previous rent quantity. Custom - Manually model the lease payment amounts by year. If Custom is chosen, the annual lease payment quantities 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 alter the yearly lease 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 determine the reversion value of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is separated into 3 subsections, with 5 inputs and one optional input throughout 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 to put it simply, a normal direct cap evaluation of a property financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained from renting 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 representing 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 expense (i.e. before inflation). Retenanting might consist of simple leasing expenses, it may include remodelling and leasing, or it might include tearing down the structure and rebuilding something new. The concept is to come to 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 development rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value calculation. It is computed by taking the residential or commercial property value internet of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you wish to tailor the reversion value.

Discount Rate - The discount rate at which to compute today worth of the ground lease cash circulations. Consider 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 enables you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about acquiring 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 section includes just one input.

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

After entering the Ground Lease Investment Cost, the section calculates 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) area allows you to calculate 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 section where you can enter the debt presumptions, and see the matching 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 design will calculate the loan amount.
• Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently just enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or every year.
  
  After entering the financial obligation presumptions for the ground lease investment, the section 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 extremely dependent on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a suggestion, in the meantime the design only enables for debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs utilized in the numerous data validation lists are discovered. 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 assistance above, I have actually 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 model accessible to everybody, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or maximum (your assistance helps keep the content coming - common realty valuation designs cost $100 - $300+ per license). Just go into a price together with an email address to send 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 design (see version notes). Paid factors to the design receive a brand-new download link through email each time the model 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 information in E17: G17.
• Updated I22 to reflect more accurate years of term remaining.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications 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 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 extra 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 improved user experience.
• Added a 'Flying 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' presumption to permit financier to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between valuation 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 better differentiate between Valuations sections and Investment Returns areas.
• 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 real estate. He has 20+ years of CRE experience and has actually underwritten over $30 billion in realty across top institutional companies.
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