The subject of ground leases has turned up a number of times in the past 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 developing an Advanced Concepts Module for our property financial modeling Accelerator program covering the mechanics of modeling ground 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 contributed to your existing property-level model. Either way, it is useful for both landowners looking to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. enhancements) relative to the fee easy interest (i.e. land).

Excel model for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the principles 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 an investor rents 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 period 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 amount of time. The lessee of a leasehold estate will usually own the enhancements on the land and utilize the land and improvements as if the lessee were the owner of the land. During the term of 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 improvements thereon, to the land owner.

Ground leases are common to prime places, where landowners do not necessarily want to sell but where they may not have the proficiency (or desire) to run. Thus, they lease the land to someone who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this frequently with workplace buildings in the downtown core of major cities.

Another case where you'll face ground leases are in retail shopping mall. Oftentimes, prominent retail tenants choose to construct and own their area but the developer does not always wish to offer the land. So, the retail renter will accept lease the ground for 40+ years and construct their own structure on the rented land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of occupants that typically consent to this structure.

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

How to Use the Ground Lease Valuation Model

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

All analysis is performed 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 important links related to the design.

The Ground Lease worksheet is broken up into 7 sections as detailed and discussed listed below:

The Residential or commercial property Description area includes 5 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 is typical in genuine estate to add the name of the investment with (Ground Lease) to signify that the financial investment is for the fee 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 automatically be computed in cell E6.
Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (i.e. the leasehold). The land is assumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a different individual or entity. So for instance, you might be considering obtaining the land on which a Target Superstore is built. Target owns the structure and is renting the land for some prolonged amount 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 area consists of 4 required inputs and one optional inputs. These inputs belong 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 likewise 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 overall 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 typically is equal to the Next Ground Lease Payment date, although the model was constructed to permit 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 the occasion you're analyzing a shorter hold period, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains business terms of the ground lease, consisting of payment amount, frequency, and lease boosts. This area includes 5 inputs plus the alternative to manually model the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see listed below), this quantity may be for a yearly or monthly payment.
Lease Increase Method - The technique utilized to design rent increases. This can either be: None - No rent boosts.
% Inc. - A percentage boost over the previous lease amount.
$ Inc. - An amount increase over the previous rent quantity.
Custom - Manually model the rent payment quantities by year. If Custom is picked, the annual rent payment quantities in row 26 become inputs for you to by hand alter (i.e. font turns blue). Important Note: If you choose 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) section where you compute the reversion value 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 area is separated into three subsections, with five inputs and one optional input across the three 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 common direct cap valuation of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from leasing 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 consisted of. The idea being to come 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 may consist of easy leasing costs, it may consist of restoration and leasing, or it might consist of tearing down the structure and restoring something new. The concept is to come to a 'Net Reversion Value (Nominal)' after representing the expense 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)' utilized as the reversion value in the ground lease present value calculation.
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 value is an optional input in the event you want to customize the reversion worth.

Discount Rate - The discount rate at which to calculate today worth of the ground lease cash circulations. Think of 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 calculate the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about buying a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The section includes just one input.

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

After going into the Ground Lease Investment Cost, the area 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 highly 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 calculate the levered (i.e. with debt) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to finance the purchase, it is within this area where you can get in the financial obligation presumptions, and see the matching return from that levered financial 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 Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model currently only enables 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 determines five return metrics:

- - Levered Internal Rate of Return
- Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return

Similar to the unlevered analysis, the resulting returns are extremely based on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will likewise greatly drive the levered return. And as a tip, in the meantime the design just permits 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 various data validation lists are found. Unless you intend to customize the design, there is no reason to alter 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've created a brief video that strolls you through the numerous 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 everybody, it is offered on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or optimum (your support assists keep the material coming - normal property evaluation designs offer for $100 - $300+ per license). Just get in 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 offer our models on this basis, please reach out to either Mike or Spencer.

We frequently upgrade the model (see variation notes). Paid contributors to the model receive a brand-new download link via email each time the design 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 information in E17: G17.
- Updated I22 to show more accurate years of term staying.
- Updates to placeholder values

Version 2.31

- Further revisions to logic in I59

Version 2.3

- Fixed issue 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 solve for issue 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 worths.
- Added additional 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 'Quick Start Guide' to offer a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption 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 in between appraisal 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 between Valuations sections and Investment Returns areas.
- 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 colleagues for commercial realty. He has 20+ years of CRE experience and has financed over $30 billion in realty throughout top institutional companies.