The subject of ground leases has actually turned up a number of times in the past couple of weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the process of developing an Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought 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 design. In either case, it is practical for both landowners looking to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. enhancements) relative to the fee simple interest (i.e. land).

Excel design 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 meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where a real estate investor rents the land (i.e. ground) only. When it comes to a ground lease, usually one celebration owns the land (i.e. charge easy interest) while a different party owns the improvements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the improvements for a prolonged period of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the cost easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will generally own the improvements on the land and use 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 lease to the lessor for use of the land. At the end of the ground lease term, the lessee should return use of the land, and any enhancements thereon, to the land owner.

Ground leases are typical to prime locations, where landowners do not necessarily want to offer but where they might not have the competence (or desire) to operate. Thus, they rent the land to someone who owns and operates the improvements on the land, and get a ground lease payment in return. You see this quite typically with office complex in the downtown core of major cities.

Another case where you'll run into ground leases are in retail shopping centers. Oftentimes, popular retail renters prefer to build and own their area but the designer does not necessarily desire to offer the land. So, the retail renter will accept lease 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 occupants that frequently consent to this structure.

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

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to permit you to place this design 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 also included where you can view a modification log for the model, in addition to find important links connected to the model.

The Ground Lease worksheet is separated into seven sections as described and described listed below:

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

SF/M2 - In cell I3 enter whether the measure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is common in realty to append the name of the financial investment with (Ground Lease) to signify that the investment is for the fee 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 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 assumed 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 example, you may be considering getting the arrive on which a Target Superstore is built. Target owns the structure and is renting the land for some extended duration of time. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of 4 required 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 must 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 overall length of the ground lease, not the variety of years staying. The maximum 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 begin. This normally is equal 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 case you're evaluating a shorter hold duration, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains the company terms of the ground lease, consisting of payment amount, frequency, and rent increases. This section includes 5 inputs plus the alternative to by hand model the rent payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see below), this quantity may be for an annual or regular monthly payment.
Lease Increase Method - The approach utilized to design lease increases. This can either be: None - No lease boosts.
% Inc. - A percentage boost over the previous lease amount.
$ Inc. - A quantity boost over the previous lease quantity.
Custom - Manually design the lease payment quantities by year. If Custom is chosen, the annual rent payment amounts in row 26 end up being inputs for you to by hand alter (i.e. font turns blue). Important Note: If you pick Custom and begin to change the yearly lease payment amounts 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) area where you calculate the reversion worth 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 area 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 common direct cap appraisal of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income 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 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 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 easy leasing costs, it may consist of remodelling and leasing, or it may include taking apart the structure and rebuilding something brand-new. The concept is to show up at a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Each 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 computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value calculation. It is calculated by taking the residential or commercial property value internet of any retenanting costs, and after that growing it by a growth rate. The worth is an optional input in case you desire to personalize the reversion worth.

Discount Rate - The discount rate at which to calculate today value of the ground lease capital. Think of 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) section enables you to compute the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering acquiring a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the corresponding returns from that investment. The area consists of just 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 determines 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 dependent on the analysis duration, 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 buying a ground lease and mean to fund the purchase, it is within this area where you can get in the financial obligation presumptions, 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 model will determine the loan amount.
- Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the model presently only enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.

After getting in the debt assumptions for the ground lease financial 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

Just like the unlevered analysis, the resulting returns are highly based on the analysis duration, payment schedule, and reversion worth. The amount and rate of the financial obligation will also heavily drive the levered return. And as a pointer, for now the design only allows for financial obligation 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 used in the different information recognition lists are found. Unless you plan to modify the model, there is no factor to alter the values in this area.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

In addition to the composed assistance above, I have actually assembled a short video that strolls you through the numerous sections 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 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 assists keep the material coming - typical real estate appraisal models sell for $100 - $300+ per license). Just go into a cost together with an email address to send the download link to, and then 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 reach out to either Mike or Spencer.

We frequently upgrade the model (see variation notes). Paid factors to the design get a 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 enhanced readability
- Updates to placeholder worths
- Fix to misspelled word on Version tab

Version 2.32

- Removed redundant information in E17: G17.
- Updated I22 to show more precise years of term remaining.
- Updates to placeholder worths

Version 2.31

- Further revisions to reasoning in I59

Version 2.3

- Fixed issue 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 extra notes under 'Quick Start Guide' to clarify typical 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 enhanced user experience.
- Added a 'Flying Start Guide' to provide a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' assumption to permit investor to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish 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 formatting to much better separate 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 colleagues for business property. He has 20+ years of CRE experience and has actually financed over $30 billion in realty throughout leading institutional firms.