The subject of ground leases has actually come up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of creating an Advanced Concepts Module for our genuine estate 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 model can be used standalone, or contributed to your existing property-level model. In any case, it is handy for both landowners looking to size a ground lease payment or leasehold owners seeking to comprehend the value of the leasehold (i.e. enhancements) relative to the fee basic 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:

- "A lease structure where a genuine estate financier leases the land (i.e. ground) just. In the case of a ground lease, generally one party owns the land (i.e. charge easy interest) while a separate party owns the improvements (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 private or entity (lessee) rents the land (i.e. ground lease) from the charge 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 use 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 must return usage of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime places, where landowners don't necessarily wish to sell but where they might not have the expertise (or desire) to run. Thus, they rent the land to someone who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this rather typically with office 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 area but the designer does not always desire to sell the land. So, the retail occupant will consent to lease the ground for 40+ years and develop their own structure on the leased land. Banks, national restaurants in outparcels, and big outlet store are examples of tenants that typically consent to this structure.
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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 contained on one worksheet. This is intentional to enable you to place this design into your own property-level design to make it simpler to add a ground lease component to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can see a change log for the model, in addition to discover important links connected to the design.

The Ground Lease worksheet is separated into seven areas as outlined and explained listed below:

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

SF/M2 - In cell I3 go into whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is typical in realty to append the name of the investment with (Ground Lease) to signify that the financial investment is for the charge easy 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 number of acres or hectares will than instantly 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 assumed 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 circumstances, you might be thinking about obtaining the arrive on which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged time period. The overall rentable location 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 investment.

Ground Lease Start Date - The month and year when the ground lease began. This need to 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 start through ground lease maturity. This is the overall length of the ground lease, not the variety of years remaining. The optimum length is 100 years. Based on the ground lease length, the model 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 built to enable 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 analyzing a much shorter hold duration, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains the service regards to the ground lease, including payment quantity, frequency, and lease increases. This section consists of 5 inputs plus the option to by hand model the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this quantity may be for an annual or monthly payment. Lease Increase Method - The technique utilized to model lease increases. This can either be: None - No rent boosts. % Inc. - A percentage boost over the previous rent amount. $ Inc. - An amount boost over the previous lease quantity. Custom - Manually design the rent payment quantities by year. If Custom is chosen, the annual rent payment amounts in row 26 become inputs for you to manually change (i.e. typeface turns blue). Important Note: If you pick Custom and begin to change the yearly lease payment quantities 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 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 broken up into three subsections, with five inputs and one optional input across the 3 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 to put it simply, a normal direct cap appraisal of a genuine estate financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings originated 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 concept 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 cost (i.e. before inflation). Retenanting might consist of simple leasing expenses, it may consist of restoration and leasing, or it may consist of taking down the building and restoring something brand-new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for the cost 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 get 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 worth utilized in the ground lease present worth calculation. It is computed by taking the residential or commercial property value net of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in the occasion you desire to customize the reversion value.

Discount Rate - The discount rate at which to compute the present worth of the ground lease cash flows. Think about this discount rate as a hurdle rate (i.e. required 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 financial investment. If you are thinking about buying a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The area includes simply one input.

Ground Lease Investment Cost - This is the expense to get land with a ground lease. It ought to include the acquisition cost, 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 computes 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 dependent on the analysis duration, 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 thinking about buying a ground lease and intend to finance the purchase, it is within this section where you can get in the debt presumptions, and see the corresponding return from that levered financial investment. The area consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan amount.
• Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the design currently just enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.
  
  After going into the debt presumptions 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
  
  Similar to 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 likewise greatly drive the levered return. And as a reminder, for now the model just enables for 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 numerous information recognition lists are discovered. Unless you mean to customize 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 created a short video that strolls you through the various sections of the model. Note that this video is based upon v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everyone, it is used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance assists keep the content coming - normal property evaluation designs cost $100 - $300+ per license). Just get in a cost together with an email 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 designs on this basis, please connect to either Mike or Spencer.
  
  We routinely update the design (see version 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 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 show more precise years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to logic 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 resolve for problem 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 values.
• Added extra notes under 'Quick 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 supply 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' presumption to permit for financier to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between assessment 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 much better differentiate in 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 coworkers for industrial genuine estate. He has 20+ years of CRE experience and has financed over $30 billion in realty throughout top institutional companies.