The topic of ground leases has turned up several times in the previous couple of weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of creating an Advanced Concepts Module for our property 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 Model in Excel.

This design can be used standalone, or included to your existing property-level design. In any case, it is helpful for both landowners wanting to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).

Excel design for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the ideas 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 leases the land (i.e. ground) only. When it comes to a ground lease, usually one celebration owns the land (i.e. cost easy interest) while a different 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 an extended 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 easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will typically own the enhancements on the land and use the land and enhancements as if the lessee were the owner of the land. During the term of the ground lease, the lessee will pay lease to the lessor for usage 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 prevail to prime places, where landowners do not always wish to offer but where they may not have the knowledge (or desire) to run. 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 on a regular basis with office structures in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, popular retail renters prefer to build and own their space however the designer does not always wish to offer the land. So, the retail occupant will accept rent the ground for 40+ years and construct their own building on the leased land. Banks, national dining establishments in outparcels, and large department shops are examples of tenants that frequently accept this structure.

Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling task.

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are included on one worksheet. This is intentional to allow you to place this model into your own property-level design 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 see a change log for the model, as well as discover essential links related to the design.

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

The Residential or commercial property Description area consists of five 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 is common in real estate to append the name of the financial investment with (Ground Lease) to denote 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 calculated 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 person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for circumstances, you may be thinking about obtaining the land on which a Target Superstore is built. Target owns the structure and is renting the land for some extended period of time. The total rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section includes 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 commenced. This should also 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 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 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 normally is equal to the Next Ground Lease Payment date, although the design was developed to enable 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 case you're evaluating a much shorter hold period, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains the company regards to the ground lease, consisting of payment amount, frequency, and rent increases. This section includes five inputs plus the choice to by hand design the lease payment quantities.

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see listed below), this amount may be for a yearly or regular monthly payment. Lease Increase Method - The method used to design lease increases. This can either be: None - No rent increases. % Inc. - A portion increase over the previous rent amount. $ Inc. - An amount increase over the previous rent amount. Custom - Manually model the lease payment quantities by year. If Custom is selected, the yearly rent payment quantities in row 26 become inputs for you to by hand change (i.e. font style turns blue). Important Note: If you select Custom and begin to alter the annual lease payment quantities 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) section where you calculate the reversion worth of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into 3 subsections, with 5 inputs and one optional input throughout 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 common 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 stemmed from renting 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 consisted of. The concept being to get to a value 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 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 might include basic leasing expenses, it might consist of renovation and leasing, or it might consist of taking down the building and reconstructing something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above computations are done before representing 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)' used as the reversion worth in the ground lease present value calculation. 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 worth internet of any retenanting costs, and then growing it by a development rate. The worth is an optional input in case you want to customize the reversion worth.

Discount Rate - The discount rate at which to compute today value of the ground lease capital. Think about this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section enables you to calculate the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are considering buying a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the matching returns from that investment. The section includes just one input.

Ground Lease Investment Cost - This is the expense 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 financial investment.

After going into 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 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 financial obligation) 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 go into the financial obligation assumptions, and see the matching return from that levered financial investment. The area includes 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 quantity.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the model currently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.
  
  After going into the debt assumptions for the ground lease investment, the section computes 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 highly based on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will also greatly drive the levered return. And as a reminder, in the meantime the design just permits for 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 utilized in the different data validation lists are discovered. Unless you mean to modify the model, there is no reason to change 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've created a short video that strolls you through the various areas of the design. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design accessible to everyone, it is offered on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or maximum (your support assists keep the content coming - typical realty evaluation models cost $100 - $300+ per license). Just enter a price together with an e-mail address to send out 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 regularly upgrade the model (see variation notes). Paid contributors to the design receive a brand-new download link by means of e-mail each time the design is updated.
  
  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 details in E17: G17.
• Updated I22 to show more precise years of term staying.
• 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 solve for issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added additional 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 'Flying Start Guide' to supply 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 investor to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in 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 formatting to much better differentiate in between Valuations sections and Investment Returns areas.
• Adjusted return formulas to make vibrant to Investment Hold Period
  
  Version 1.0
  propertyspy.co.nz
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for business realty. He has 20+ years of CRE experience and has financed over $30 billion in genuine estate across leading institutional firms.