The subject of ground leases has actually shown up several times in the previous few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating 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 good time to share my Ground Lease Valuation Model in Excel.

This design can be utilized standalone, or included to your existing property-level model. In any case, it is practical for both landowners looking to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. improvements) relative to the charge basic 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 principles of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:

- "A lease structure where an investor leases the land (i.e. ground) only. In the case of a ground lease, typically one party owns the land (i.e. cost basic interest) while a separate party owns the improvements (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 a private or entity (lessee) rents 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 typically 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 use of the land. At the end of the ground lease term, the lessee must return use of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime locations, where landowners don't always wish to sell however where they might not have the proficiency (or desire) to run. Thus, they lease the land to somebody who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this frequently with office complex in the downtown core of significant cities.

Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, prominent retail occupants choose to develop and own their space but the developer doesn't always wish to sell the land. So, the retail occupant will agree to lease the ground for 40+ years and build their own structure on the rented land. Banks, nationwide dining establishments in outparcels, and large outlet store are examples of renters that often accept this structure.

Quick Note: Not interested in DIY analysis? Consider working 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 contained on one worksheet. This is deliberate to permit you to place this design into your own property-level model to make it easier to include a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a change log for the design, in addition to find crucial links connected to the model.

The Ground Lease worksheet is broken up into seven areas as detailed and explained listed below:

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

SF/M2 - In cell I3 enter 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 common in realty to append the name of the investment with (Ground Lease) to represent that the financial investment is for the charge 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 instantly be calculated 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 presumed 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 example, you may be considering acquiring the arrive at which a Target Superstore is developed. Target owns the building and is leasing the land for some prolonged time period. The total 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 needed inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.
condos.ca
Ground Lease Start Date - The month and year when the ground lease commenced. 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 commencement 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 upon the ground lease length, the model 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 usually is equal to the Next Ground Lease Payment date, although the design was constructed to enable 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 event you're examining a shorter hold period, simply alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area consists of the company terms of the ground lease, including payment amount, frequency, and rent increases. This section consists of 5 inputs plus the choice to manually model the rent payment quantities.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this amount may be for a yearly or month-to-month payment. Lease Increase Method - The technique utilized to design lease increases. This can either be: None - No rent boosts. % Inc. - A portion increase over the previous rent amount. $ Inc. - An amount increase over the previous rent quantity. Custom - Manually model the lease payment amounts by year. If Custom is picked, the yearly rent payment amounts in row 26 end up being inputs for you to manually change (i.e. font style turns blue). Important Note: If you select Custom and begin to alter the yearly lease payment quantities in row 26, there is no other 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), today value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is separated into three subsections, with 5 inputs and one optional input across the three 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 in other words, a typical direct cap evaluation of a realty financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from leasing the enhancements, 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 concept being to come 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 improvements 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 include simple leasing expenses, it may include renovation and leasing, or it may include tearing down the building and restoring something new. The concept is to reach 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 growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present worth calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value computation. It is computed by taking the residential or commercial property value web of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in case you wish to personalize the reversion value.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease money circulations. Consider this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease investment.
realtor.com
Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area allows you to determine the unlevered (i.e. before financial obligation) 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 corresponding returns from that investment. The section consists of simply one input.

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

After getting in the Ground Lease Investment Cost, the section 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 value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area allows you to calculate the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about buying a ground lease and mean to finance the purchase, it is within this section where you can get in the debt assumptions, and see the corresponding return from that levered investment. The section includes 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan quantity.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the design currently only 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 entering the financial obligation presumptions 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
  
  Just like the unlevered analysis, the resulting returns are extremely based on the analysis duration, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a reminder, in the meantime the design only permits financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the numerous data validation lists are found. Unless you mean to modify the model, there is no factor 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 have actually created a short video that strolls you through the different 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 design accessible to everyone, it is used on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your support helps keep the content coming - common property evaluation designs cost $100 - $300+ per license). Just enter a rate 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 use our models on this basis, please connect to either Mike or Spencer.
  
  We frequently upgrade the model (see version notes). Paid contributors to the design receive a new download link by means of e-mail each time the model is upgraded.
  
  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 show more accurate years of term remaining.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications 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 resolve for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• 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 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 model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable for investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in 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 better separate between Valuations sections and Investment Returns areas.
• Adjusted return formulas 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 industrial genuine estate. He has 20+ years of CRE experience and has underwritten over $30 billion in real estate across leading institutional companies.