The topic of ground leases has actually come up several times in the previous few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the process of developing an Advanced Concepts Module for our real estate 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.
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This model can be used standalone, or included to your existing property-level design. In either case, it is useful for both to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. improvements) relative to the charge easy interest (i.e. land).

Excel model for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the principles 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 real estate investor rents the land (i.e. ground) just. When it comes to a ground lease, generally one celebration owns the land (i.e. charge easy interest) while a separate celebration owns the improvements (i.e. leasehold interest). In most cases, the owner of the land rents the land to the owner of the improvements for a prolonged period of time (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 fee basic owner (lessor) of the land for a prolonged duration 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 regard to the ground lease, the lessee will pay lease 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 prevail to prime locations, where landowners don't always want to sell but where they might not have the know-how (or desire) to operate. Thus, they rent the land to somebody who owns and runs the enhancements on the land, and get 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 run into ground leases are in retail shopping centers. Oftentimes, popular retail tenants choose to build and own their space but the developer doesn't necessarily wish to sell the land. So, the retail occupant will consent to lease the ground for 40+ years and construct their own structure on the leased land. Banks, national dining establishments in outparcels, and large outlet store are examples of occupants that frequently 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 sections of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to permit you to insert this model into your own property-level design to make it easier to include a ground lease part to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a change log for the design, along with discover essential links associated with the design.

The Ground Lease worksheet is separated into seven sections as detailed and explained below:

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

SF/M2 - In cell I3 get in whether the measure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in genuine estate to append the name of the financial investment with (Ground Lease) to denote that the financial investment is for the fee 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 automatically 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for example, you may be thinking about getting the arrive on which a Target Superstore is constructed. Target owns the structure and is leasing the land for some prolonged amount of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section 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 ought to likewise 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 beginning through ground lease maturity. This is the total length of the ground lease, not the number of years remaining. The maximum length is 100 years. Based upon 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 amounts to the Next Ground Lease Payment date, although the model was developed 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 event you're analyzing a shorter hold period, merely change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

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

Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this quantity might be for an annual or regular monthly payment. Lease Increase Method - The technique used to design lease increases. This can either be: None - No lease boosts. % Inc. - A percentage increase over the previous rent amount. $ Inc. - An amount increase over the previous rent quantity. Custom - Manually design the lease payment quantities by year. If Custom is selected, the yearly 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 begin to change the annual 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) section where you calculate the reversion value 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 separated into 3 subsections, with five 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 simply put, a normal direct cap valuation of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings obtained 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 get 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 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 cost (i.e. before inflation). Retenanting might consist of simple leasing expenses, it might consist of remodelling and leasing, or it may include taking down the building and rebuilding something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before accounting for inflation (i.e. development). 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 computation. 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 internet of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in the occasion you wish to tailor the reversion worth.

Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Consider this discount rate as an obstacle 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 thinking about acquiring 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 just one input.

Ground Lease Investment Cost - This is the cost to obtain land with a ground lease. It needs to include the acquisition expense, together with any other due diligence, closing, and pursuit expenses associated with the investment.

After getting in the Ground Lease Investment Cost, the section computes 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 depending on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to compute the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about buying a ground lease and plan to fund the purchase, it is within this area where you can enter the financial obligation assumptions, and see the matching return from that levered financial 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 quantity.
• Annual Rate Of Interest - The annual 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 annually.
  
  After entering the financial obligation assumptions for the ground lease financial investment, the area determines 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 extremely depending on the analysis period, payment schedule, and reversion value. The amount and rate of the debt will also greatly drive the levered return. And as a reminder, in the meantime the design only permits for financial obligation 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 validation lists are discovered. Unless you intend to customize the design, there is no reason to alter the worths 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 assembled a brief video that walks you through the various 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 everyone, it is offered on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your support assists keep the material coming - typical property valuation models cost $100 - $300+ per license). Just go into a cost together with an e-mail address to send the download link to, and then 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 upgrade the design (see variation notes). Paid contributors to the design get a new download link through e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick Start Guide' with updates and for improved readability
• Updates to placeholder worths
• Fix to misspelled word on Version tab
  
  Version 2.32
  
  - Removed redundant information in E17: G17.
• Updated I22 to reflect more accurate years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to logic in I59
  
  Version 2.3
  
  - Fixed concern 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 fix for concern 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 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 enhanced user experience.
• Added a 'Quick Start Guide' to offer a tutorial for utilizing the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable financier to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish between appraisal 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 differentiate in between Valuations areas and Investment Returns sections.
• 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 coworkers for commercial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate throughout leading institutional firms.