The topic of ground leases has shown up a number of times in the previous few weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of producing an Advanced Concepts Module for our property 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 contributed to your existing property-level model. Either method, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. improvements) 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 unknown with the ideas of Ground Lease and Leasehold Interest, I'll refer you to the 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, generally one party owns the land (i.e. cost simple interest) while a separate party 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 duration of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the cost easy owner (lessor) of the land for a prolonged period of time. The lessee of a leasehold estate will generally own the enhancements on the land and utilize the land and improvements 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 areas, where landowners don't necessarily wish to offer however where they may not have the know-how (or desire) to run. Thus, they lease the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this quite frequently with workplace structures in the downtown core of significant cities.

Another case where you'll face ground leases are in retail shopping mall. Oftentimes, popular retail renters choose to construct and own their space however the developer doesn't always want to sell the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own structure on the leased land. Banks, national restaurants in outparcels, and big outlet store are examples of renters that frequently consent to this structure.

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

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to allow you to insert this model into your own property-level model to make it much easier to include a ground lease part to your analysis.

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

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

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

SF/M2 - In cell I3 go into whether the procedure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in genuine estate to add the name of the investment with (Ground Lease) to signify that the investment is for the fee simple interest in land with a ground lease. Address - Address, city, state/province, zip/postal code, and nation. 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 location in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate person or entity. So for instance, you might be thinking about obtaining the arrive on which a Target Superstore is constructed. Target owns the building and is renting the land for some extended time period. The total rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of 4 needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This should 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 total length of the ground lease, not the variety of years staying. The optimum length is 100 years. Based on the ground lease length, the design then computes the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to begin. This usually is equivalent to the Next Ground Lease Payment date, although the design was constructed to allow for 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, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area consists of the organization terms of the ground lease, consisting of payment amount, frequency, and lease increases. This area consists of five inputs plus the choice to by hand design the rent payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this quantity may be for an annual or monthly payment. Lease Increase Method - The method used to design lease boosts. This can either be: None - No lease boosts. % Inc. - A portion increase over the previous rent quantity. $ Inc. - An amount boost over the previous rent quantity. Custom - Manually design the rent payment quantities by year. If Custom is picked, the yearly lease payment quantities in row 26 become inputs for you to manually alter (i.e. font turns blue). Important Note: If you pick Custom and start to change the annual lease payment quantities in row 26, there is no other 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 worth 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 separated into three subsections, with five inputs and one optional input across the three subsections.

Ground Lease Reversion Value - Within this subsection you design the value 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 investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from renting the enhancements, 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 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 get back 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 may consist of easy leasing expenses, it may include remodelling and leasing, or it might include taking apart the building and restoring something new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost 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 reach a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value estimation. It is computed by taking the residential or commercial property value internet of any retenanting expenses, and after that growing it by a development rate. The worth is an optional input in case you desire to customize the reversion value.

Discount Rate - The discount rate at which to calculate 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 determine the unlevered (i.e. before debt) returns of a ground lease 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 investment. The section includes just 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 costs connected to the financial investment.

After getting in the Ground Lease Investment Cost, the section determines 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 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 determine the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering buying a ground lease and plan to fund the purchase, it is within this section where you can get in the financial obligation assumptions, and see the corresponding 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 compute the loan quantity.
• 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 month-to-month or each year.
  
  After getting in 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
  
  Just like the unlevered analysis, the resulting returns are extremely reliant on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will also heavily drive the levered return. And as a reminder, in the meantime the design just enables 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 various information 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 put together a brief video that walks you through the numerous 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 design available to everybody, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your support assists keep the material coming - normal realty valuation designs cost $100 - $300+ per license). Just go into a rate together with an e-mail address to send out 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 provide our models on this basis, please connect to either Mike or Spencer.
  
  We frequently upgrade the model (see variation notes). Paid contributors to the design receive a new download link via email each time the model 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 details in E17: G17.
• Updated I22 to reflect more precise years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to reasoning in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to fix for concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra notes under 'Quick Start Guide' to clarify typical confusion around start dates for various sections.
• 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 offer a tutorial for utilizing 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 permit investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between appraisal 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 format to better differentiate between Valuations areas and Investment Returns sections.
• Adjusted return formulas to make vibrant to Investment Hold Period
  
  Version 1.0
  osucascades.edu
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for industrial property. He has 20+ years of CRE experience and has actually financed over $30 billion in real estate across leading institutional firms.
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