The subject of ground leases has actually shown up several times in the previous few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my Ground Lease Valuation Model in Excel.

This model can be utilized standalone, or contributed to your existing property-level design. In either case, it is valuable for both landowners wanting to size a ground lease payment or leasehold owners seeking to understand the worth of the leasehold (i.e. improvements) relative to the charge easy interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the concepts 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 financier leases the land (i.e. ground) just. When it comes to a ground lease, generally one party owns the land (i.e. fee simple interest) while a different party owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the improvements for an extended time period (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the cost simple 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 usage of the land. At the end of the ground lease term, the lessee should return use of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime locations, where landowners do not 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 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 run into ground leases are in retail shopping centers. Oftentimes, popular retail occupants prefer to construct and own their area but the designer doesn't necessarily wish to offer the land. So, the retail occupant will agree to lease the ground for 40+ years and build their own building on the leased land. Banks, nationwide dining establishments in outparcels, and big outlet store are examples of tenants that typically accept this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to handle 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 insert this model into your own property-level model to make it simpler to add a ground lease component to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a modification log for the design, along with discover crucial links associated with the design.

The Ground Lease worksheet is separated into 7 sections as detailed and explained listed below:

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

SF/M2 - In cell I3 get in whether the step of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is typical in property to add the name of the financial investment with (Ground Lease) to represent that the investment is for the fee basic 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 variety of acres or hectares will than immediately be computed 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. improvements) to be owned by a separate person or entity. So for instance, you may be considering acquiring the land on which a Target Superstore is developed. Target owns the structure and is leasing the land for some prolonged period of time. 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 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 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 commencement through ground lease maturity. This is the overall 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 equivalent to the Next Ground Lease Payment date, although the model 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 examining a much shorter hold period, just change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains business terms of the ground lease, including payment quantity, frequency, and lease increases. This section includes 5 inputs plus the alternative to manually model the lease payment quantities.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this quantity might be for a yearly or monthly payment.
Lease Increase Method - The method utilized to model lease boosts. This can either be: None - No lease increases.
% Inc. - A portion boost over the previous rent quantity.
$ Inc. - A quantity boost over the previous lease amount.
Custom - Manually design the lease payment amounts by year. If Custom is selected, the yearly rent payment quantities in row 26 end up being inputs for you to by hand change (i.e. font style turns blue). Important Note: If you pick Custom and begin to alter the annual rent 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) area where you compute the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed value 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 worth of the residential or commercial property as if there was no ground lease. Or simply put, a normal direct cap valuation of a real estate financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from renting the improvements, special 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 get here at 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 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 consist of taking down the structure and reconstructing something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Annually) - All of the above calculations are done before representing 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 calculated by taking the residential or commercial property worth net of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you wish to tailor the reversion value.

Discount Rate - The discount rate at which to calculate today worth of the ground lease money circulations. Think about this discount rate as an obstacle 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 permits you to compute the unlevered (i.e. before debt) returns of a ground lease 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 investment. The section consists of just one input.

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

After entering the Ground Lease Investment Cost, the section determines 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 extremely based on the analysis duration, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) area allows you to compute the levered (i.e. with debt) 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 section where you can enter the debt presumptions, and see the matching return from that levered investment. The area includes 3 inputs.

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will compute the loan quantity.
- Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the model currently just enables for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.

After getting in the financial obligation assumptions for the ground lease financial investment, the section determines 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 dependent on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will also heavily drive the levered return. And as a pointer, for now the design just enables debt 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 different information recognition lists are discovered. Unless you intend to modify the model, there is no factor to alter the worths in this section.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

In addition to the written guidance above, I've created a short video that strolls you through the different sections of the model. Note that this video is based upon v1.0 of the model.

Download the Ground Lease Valuation Model

To make this model available to everybody, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or optimum (your assistance assists keep the material coming - normal realty valuation designs sell for $100 - $300+ per license). Just enter a price 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 models on this basis, please connect to either Mike or Spencer.

We regularly upgrade the model (see variation notes). Paid factors to the model get a brand-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 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 precise years of term remaining.
- Updates to placeholder values

Version 2.31

- Further modifications 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 solve for concern 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 'Flying 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 improved user experience.
- Added a 'Flying Start Guide' to provide a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable investor to evaluate returns on an Analysis Period 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 distinguish in 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 coworkers for commercial real estate. He has 20+ years of CRE experience and has financed over $30 billion in property throughout top institutional firms.