The subject of ground leases has actually turned up numerous times in the past few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of producing an Advanced Concepts Module for our real estate monetary modeling Accelerator program covering the mechanics of leases. So I believed now would be a great time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or included to your existing property-level model. In either case, it is practical for both landowners looking to size a ground lease payment or leasehold owners seeking to understand the value of the leasehold (i.e. enhancements) relative to the fee simple interest (i.e. land).

Excel model for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar 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 genuine estate investor rents the land (i.e. ground) only. When it comes to a ground lease, normally one party owns the land (i.e. cost easy interest) while a different celebration owns the improvements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the enhancements for an extended time period (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the fee simple owner (lessor) of the land for a prolonged amount of time. 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 lease to the lessor for use of the land. At the end of the ground lease term, the lessee needs to return use of the land, and any improvements thereon, to the land owner.

Ground leases are common to prime locations, where landowners don't necessarily wish to sell but where they may not have the proficiency (or desire) to operate. Thus, they rent the land to somebody who owns and runs 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 face ground leases are in retail shopping centers. Oftentimes, prominent retail renters choose to develop and own their space however the developer does not always wish to sell the land. So, the retail tenant will consent to lease the ground for 40+ years and construct their own building on the rented land. Banks, national restaurants in outparcels, and big outlet store are examples of occupants that often consent to this structure.

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

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to enable you to insert this design into your own property-level model to make it much easier to add a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can view a change log for the design, as well as find important links associated with the design.

The Ground Lease worksheet is separated into 7 sections as laid out and explained listed below:

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

SF/M2 - In cell I3 go into whether the measure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is common in property to append the name of the investment with (Ground Lease) to represent that the financial investment is for the charge simple 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 immediately be determined 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 individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for instance, you may be thinking about obtaining the arrive at which a Target Superstore is built. Target owns the building and is leasing the land for some extended period of time. The total rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 4 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 began. This should 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 number of years staying. The optimum length is 100 years. Based upon 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 start. This generally is equivalent to the Next Ground Lease Payment date, although the design was built 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 preferred analysis end date.

Section 2 - Investment Timing

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

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see listed below), this quantity may be for a yearly or regular monthly payment. Lease Increase Method - The method used to design rent boosts. This can either be: None - No lease increases. % Inc. - A percentage boost over the previous rent quantity. $ Inc. - A quantity increase over the previous lease 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 manually change (i.e. typeface turns blue). Important Note: If you pick Custom and start to change the annual rent payment quantities 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 worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into three subsections, with 5 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 in other words, a normal direct cap valuation of a property investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from leasing 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 show up at a worth 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 enhancements 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 may include simple leasing costs, it might include restoration and leasing, or it may include tearing down the structure and reconstructing something new. The concept is to come to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Per Year) - All of the above calculations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth estimation. It is calculated by taking the residential or commercial property worth net of any retenanting costs, and then growing it by a development rate. The value is an optional input in the occasion you desire to personalize the reversion value.

Discount Rate - The discount rate at which to determine the present 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 investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section enables you to determine the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering buying a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The section consists of simply one input.

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

After going into 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 depending on the analysis period, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section allows you to calculate the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to fund the purchase, it is within this section where you can enter the debt assumptions, and see the matching return from that levered investment. The area includes three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine 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 regular monthly or yearly.
  
  After entering the financial obligation assumptions for the ground lease investment, the section calculates 5 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 worth. The quantity and rate of the debt will also heavily drive the levered return. And as a tip, in the meantime the design only enables financial obligation 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 information validation lists are found. Unless you intend to modify the model, there is no factor to change the values 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 various areas of the design. 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 used 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 - typical real estate appraisal designs offer for $100 - $300+ per license). Just get in a rate together with an email 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 frequently update the model (see version notes). Paid contributors to the design receive a new download link via email each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick Start Guide' with updates and for improved readability
• Updates to placeholder worths
• 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 staying.
• Updates to placeholder worths
  seasideapartmentsmalta.com
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() variety 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 issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra notes under 'Flying 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 'Quick Start Guide' to supply a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to permit for financier to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between evaluation 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 differentiate between Valuations areas and Investment Returns areas.
• Adjusted return solutions to make dynamic to Investment Hold Period
  
  Version 1.0
  direct-croatia.com
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for industrial realty. He has 20+ years of CRE experience and has financed over $30 billion in realty throughout top institutional firms.