The topic of ground leases has actually shown 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 process of creating 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 great time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or contributed to your existing property-level design. In any case, it is valuable for both landowners looking to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. enhancements) relative to the fee easy interest (i.e. land).

Excel design for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the ideas 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 an investor leases the land (i.e. ground) just. When it comes to a ground lease, normally one celebration owns the land (i.e. charge easy interest) while a separate party owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the enhancements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the charge simple owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will usually own the enhancements 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 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 improvements thereon, to the land owner.

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

Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, prominent retail renters prefer to construct and own their area but the developer does not necessarily wish to sell the land. So, the retail tenant will agree to lease the ground for 40+ years and develop their own building on the rented land. Banks, national restaurants in outparcels, and large outlet store are examples of renters that typically agree to this structure.

Quick Note: Not interested in 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 contained on one worksheet. This is intentional to allow you to insert this design into your own property-level design to make it simpler to include a ground lease element to your analysis.

All analysis is carried out 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 related to the model.

The Ground Lease worksheet is broken up into seven sections as described and discussed listed below:

The Residential or commercial property Description section includes 5 inputs associated 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 genuine estate to add the name of the investment with (Ground Lease) to represent that the 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 variety of acres or hectares will than immediately 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 different person or entity. So for example, you may be thinking about getting the arrive at which a Target Superstore is constructed. Target owns the structure and is renting the land for some prolonged 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 includes four 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 need 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 beginning 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 on the ground lease length, the design then determines the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This typically is equivalent to the Next Ground Lease Payment date, although the model was built 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 the event you're analyzing a much shorter hold duration, simply change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes the organization terms of the ground lease, including payment quantity, frequency, and rent increases. This area consists of 5 inputs plus the option to by hand design the rent 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 rent increases. This can either be: None - No rent increases.
% Inc. - A portion boost over the previous rent amount.
$ Inc. - An amount increase over the previous rent amount.
Custom - Manually design the rent payment amounts by year. If Custom is chosen, the annual rent payment amounts in row 26 become inputs for you to manually alter (i.e. typeface turns blue). Important Note: If you pick Custom and start to change the annual rent payment amounts 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) area where you compute the reversion worth of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is broken up into three 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 typical direct cap appraisal of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from leasing the improvements, unique 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 arrive at 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 may include simple leasing costs, it might consist of renovation and leasing, or it might include tearing down the building and restoring something new. The idea is to come to a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Annually) - All of the above estimations are done before representing inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present value computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth computation. It is determined by taking the residential or commercial property value net of any retenanting costs, and then growing it by a development rate. The worth is an optional input in case you wish to customize the reversion value.

Discount Rate - The discount rate at which to determine today value of the ground lease cash flows. Consider this discount rate as an obstacle rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area permits you to determine the unlevered (i.e. before debt) returns of a ground lease 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 consists of simply one input.

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

After entering the Ground Lease Investment Cost, the area 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 highly based on the analysis period, payment schedule, and reversion worth.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) area allows you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering purchasing a ground lease and intend to finance the purchase, it is within this area where you can go into the debt assumptions, and see the matching return from that levered 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 determine the loan amount.
- Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the design presently only permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or every year.

After entering the financial obligation presumptions for the ground lease 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

As with the unlevered analysis, the resulting returns are highly depending on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will likewise greatly drive the levered return. And as a suggestion, in the meantime the model only 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 section is where backend inputs utilized in the numerous information recognition lists are discovered. Unless you mean 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 composed assistance above, I have actually put together a brief video that walks you through the different areas of the model. Note that this video is based on v1.0 of the design.

Download the Ground Lease Valuation Model

To make this design accessible to everybody, it is used on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or optimum (your support helps keep the content coming - typical genuine estate appraisal designs sell for $100 - $300+ per license). Just get in a price together with an e-mail 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 model (see variation notes). Paid contributors to the model receive a new download link by means of 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 values
- Fix to misspelled word on Version tab

Version 2.32

- Removed redundant details in E17: G17.
- Updated I22 to reflect more precise years of term staying.
- Updates to placeholder values

Version 2.31

- Further revisions to logic in I59

Version 2.3

- Fixed concern 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 fix for issue 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 'Flying start Guide' to clarify common confusion around start dates for various sections.
- 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 using the design.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification functions.
- 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 much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 format to better differentiate 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 commercial property. He has 20+ years of CRE experience and has financed over $30 billion in property across leading institutional firms.