The topic of ground leases has actually turned up several times in the previous couple of weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the process of creating an Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a good time to share my Ground Lease in Excel.
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This design can be used standalone, or contributed to your existing property-level model. Either method, it is valuable for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. improvements) relative to the cost simple interest (i.e. land).

Excel design for evaluating 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 definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor rents the land (i.e. ground) just. In the case of a ground lease, normally one party owns the land (i.e. cost easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the improvements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In real 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 an extended amount of time. The lessee of a leasehold estate will typically own the improvements 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 usage of the land, and any enhancements thereon, to the land owner.

Ground leases are typical to prime places, where landowners do not necessarily want to offer but where they may not have the know-how (or desire) to operate. Thus, they rent the land to somebody who owns and runs the improvements on the land, and get a ground lease payment in return. You see this rather frequently with workplace buildings in the downtown core of significant cities.

Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, popular retail occupants prefer to construct and own their area but the developer does not necessarily want to sell the land. So, the retail renter will agree to lease the ground for 40+ years and develop their own structure on the leased land. Banks, nationwide dining establishments in outparcels, and big department shops are examples of tenants that often consent to this structure.

Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to handle 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 place this design into your own property-level model to make it simpler to add a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a change log for the design, as well as discover crucial links connected to the design.

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

The Residential or commercial property Description area consists of 5 inputs associated to the investment. These inputs are:

SF/M2 - In cell I3 enter 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 genuine estate to append the name of the investment with (Ground Lease) to denote that the investment is for the cost 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 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 assumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for instance, you may be considering acquiring the land on which a Target Superstore is developed. Target owns the structure and is renting the land for some extended time period. The overall rentable area of the building 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 started. This should 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 start through ground lease maturity. This is the total length of the ground lease, not the variety of years remaining. The optimum length is 100 years. Based on 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 begin. This generally amounts to the Next Ground Lease Payment date, although the design was built to permit 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 occasion you're evaluating a much shorter hold period, simply change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes business terms of the ground lease, including payment quantity, frequency, and rent increases. This section includes 5 inputs plus the choice to by hand model the lease payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this amount might be for an annual or month-to-month payment. Lease Increase Method - The approach utilized to model lease boosts. This can either be: None - No lease boosts. % Inc. - A percentage increase over the previous rent amount. $ Inc. - An amount increase over the previous lease amount. Custom - Manually design the lease payment quantities by year. If Custom is picked, the annual rent payment amounts in row 26 become inputs for you to manually change (i.e. font style turns blue). Important Note: If you pick Custom and start to alter the annual rent 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 determine the reversion value 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 section is separated into 3 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 in other words, a normal direct cap appraisal 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, unique 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 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 consist of simple leasing expenses, it may include restoration and leasing, or it may consist of tearing down the building and reconstructing something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Per Year) - All of the above calculations are done before accounting for 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)' utilized as the reversion value in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value computation. It is determined by taking the residential or commercial property value web of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you wish to personalize the reversion value.

Discount Rate - The discount rate at which to determine the present worth of the ground lease capital. 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 permits you to determine the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease, it is within this section 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 obtain land with a ground lease. It needs to include the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the investment.

After going into 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 highly based on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area permits you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and intend to finance the purchase, it is within this section where you can enter the debt assumptions, and see the corresponding return from that levered investment. The section consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan amount.
• Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model currently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or annually.
  
  After going into the financial obligation assumptions for the ground lease financial investment, the section calculates 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 depending on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will also greatly drive the levered return. And as a tip, in the meantime the model 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 final section is where backend inputs utilized in the different data recognition lists are discovered. Unless you intend to modify the model, there is no factor to change the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I've created a short 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 available to everybody, it is provided on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or maximum (your assistance helps keep the material coming - common property valuation designs offer for $100 - $300+ per license). Just go into a cost together with an e-mail address to send the download link to, and after that click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we use our designs on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the model (see variation notes). Paid factors to the model get a new download link through e-mail each time the design is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick 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 staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() range 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 fix!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for different 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 supply a tutorial for utilizing 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' assumption to permit investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish between valuation 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 distinguish 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 coworkers for business realty. He has 20+ years of CRE experience and has financed over $30 billion in realty across leading institutional firms.
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