The topic of ground leases has turned up numerous times in the previous couple of weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our property monetary 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 model. In either case, it is practical for both landowners looking to size a ground lease payment or leasehold owners aiming to understand the value of the leasehold (i.e. improvements) relative to the charge easy interest (i.e. land).

Excel model for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the 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 leases the land (i.e. ground) only. In the case of a ground lease, usually one party owns the land (i.e. charge simple interest) while a separate celebration 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 time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the cost easy owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will usually 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 use of the land. At the end of the ground lease term, the lessee should 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 wish to offer but where they might not have the expertise (or desire) to run. Thus, they rent the land to somebody who owns and runs the improvements on the land, and receive a ground lease payment in return. You see this on a regular basis with office buildings in the downtown core of significant cities.

Another case where you'll face ground leases are in retail shopping mall. Oftentimes, prominent retail tenants prefer to develop and own their space but the designer does not necessarily want to offer the land. So, the retail occupant will accept rent the ground for 40+ years and develop their own building on the leased land. Banks, national restaurants in outparcels, and large department stores are examples of tenants that often consent to this structure.

Quick Note: Not thinking about DIY analysis? Consider working 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 deliberate to permit you to insert this design into your own property-level design to make it much easier to add a ground lease element to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can see a modification log for the model, in addition to discover essential links associated with the model.

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

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

SF/M2 - In cell I3 go into whether the step of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in property to append the name of the financial investment with (Ground Lease) to signify that the financial 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 automatically be determined in cell E6. Leasehold Net Rentable Area - Total net rentable area 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 different person or entity. So for instance, you may be considering obtaining the arrive at which a Target Superstore is constructed. Target owns the structure and is leasing 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 section consists of 4 needed inputs and one optional inputs. These inputs are related to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease started. 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 beginning through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The optimum length is 100 years. Based upon the ground lease length, the model 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 normally is equal to the Next Ground Lease Payment date, although the model was built to permit 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 case you're analyzing a shorter hold period, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes the organization regards to the ground lease, including payment amount, frequency, and rent increases. This section consists of five inputs plus the option to manually design the rent payment quantities.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see listed below), this amount may be for an annual or regular monthly payment. Lease Increase Method - The approach utilized to model lease increases. This can either be: None - No rent boosts. % Inc. - A portion increase over the previous rent amount. $ Inc. - A quantity increase over the previous rent amount. Custom - Manually design the lease payment amounts by year. If Custom is chosen, the annual lease payment amounts in row 26 end up being inputs for you to by hand alter (i.e. typeface turns blue). Important Note: If you pick Custom and start to alter the annual lease 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 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 5 inputs and one optional input across the three subsections.

Ground Lease Reversion Value - Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a common direct cap assessment of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income 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 included. The idea being to reach 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 get back 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 might include simple leasing expenses, it might consist of renovation and leasing, or it may include tearing down the building and restoring something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. development). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth computation. It is computed 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 worth.

Discount Rate - The discount rate at which to compute today worth of the ground lease money circulations. Consider this discount rate as a hurdle rate (i.e. necessary 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 debt) returns of a ground lease financial investment. If you are considering purchasing a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the corresponding returns from that financial investment. The area includes simply one input.

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

After entering 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 period, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section allows you to determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about purchasing a ground lease and intend to fund the purchase, it is within this section where you can get in the debt assumptions, 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 yearly rate to be paid on the mortgage. Note that the model presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.
  
  After going into the financial obligation presumptions for the ground lease financial investment, the area calculates five 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 duration, payment schedule, and reversion value. The quantity and rate of the debt will also heavily drive the levered return. And as a reminder, in the meantime the model only enables financial obligation with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs used in the various data validation lists are discovered. Unless you plan to customize the model, there is no factor to change the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually assembled a short video that strolls you through the different sections of the model. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design available to everybody, it is offered 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 - common realty evaluation designs cost $100 - $300+ per license). Just enter a cost 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 offer our models on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the design (see version notes). Paid factors to the design get a brand-new download link by means of email each time the model 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 details in E17: G17.
• Updated I22 to reflect more accurate years of term staying.
• Updates to placeholder values
  
  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 problem 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 values.
• Added extra 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 'Flying 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 enable financier to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in between valuation 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 distinguish between Valuations sections and Investment Returns sections.
• Adjusted return solutions to make vibrant to Investment Hold Period
  
  Version 1.0
  realtor.com
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for commercial genuine estate. He has 20+ years of CRE experience and has financed over $30 billion in genuine estate across top institutional companies.