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

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

Excel design for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar 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 rents the land (i.e. ground) just. In the case of a ground lease, generally one celebration owns the land (i.e. fee basic interest) while a different 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 a prolonged duration of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the fee easy owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will normally own the enhancements 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 enhancements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners do not necessarily wish to offer however where they might not have the know-how (or desire) to run. Thus, they rent the land to somebody who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of major cities.

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, prominent retail occupants choose to construct and own their area however the developer does not necessarily want to sell the land. So, the retail occupant will accept rent the ground for 40+ years and build their own structure on the rented land. Banks, national restaurants in outparcels, and big outlet store are examples of tenants that often consent to this structure.

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

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 place this model into your own property-level design to make it simpler to include a ground lease element to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can view a change log for the model, along with discover important links connected to the design.

The Ground Lease worksheet is separated into seven areas as detailed and described below:

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

SF/M2 - In cell I3 enter whether the step of size is 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 financial investment with (Ground Lease) to represent that the investment is for the fee 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 presumed 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 circumstances, you might be considering getting the land on which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged amount of time. The total rentable location of the building 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 are related to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This need to 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 beginning 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 computes the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This generally is equal to the Next Ground Lease Payment date, although the design was constructed to permit 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 evaluating a much shorter hold period, merely change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes the business regards to the ground lease, including payment amount, frequency, and rent increases. This area includes 5 inputs plus the alternative to manually model the rent payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see listed below), this amount may be for an annual or regular monthly payment.
Lease Increase Method - The technique utilized to design lease increases. This can either be: None - No rent increases.
% Inc. - A percentage increase over the previous rent quantity.
$ Inc. - An amount boost over the previous lease amount.
Custom - Manually design the rent payment amounts by year. If Custom is picked, the yearly lease 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 choose Custom and begin to alter the annual lease payment amounts 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) section where you compute 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 section is broken up into 3 subsections, with five inputs and one optional input throughout the 3 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 simply put, a normal direct cap assessment of a real estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income stemmed from leasing the enhancements, special 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 show up at 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 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 cost (i.e. before inflation). Retenanting may consist of simple leasing expenses, it may consist of renovation and leasing, or it might consist of tearing down the building and restoring something brand-new. The concept is to come to a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Each Year) - All of the above computations are done before representing inflation (i.e. development). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present value computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth estimation. It is calculated by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you desire to personalize the reversion worth.

Discount Rate - The discount rate at which to compute the present value of the ground lease money flows. Consider this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area permits 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 area where you can enter your acquisition/investment cost, and see the matching returns from that investment. The area includes just one input.

Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It should 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 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 period, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section enables you to determine 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 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 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 amount.
- Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the design presently only permits for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or yearly.

After entering the financial obligation presumptions for the ground lease investment, the area computes 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 highly depending on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will likewise greatly drive the levered return. And as a pointer, in the meantime the design just permits 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 various data validation lists are found. Unless you plan to customize the design, there is no reason to alter the worths in this area.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

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

Download the Ground Lease Valuation Model

To make this design accessible to everyone, it is provided on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your support assists keep the content coming - normal property evaluation models offer 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 frequently upgrade the design (see variation notes). Paid factors to the model get a brand-new download link via e-mail each time the model 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 details in E17: G17.
- Updated I22 to reflect more accurate years of term staying.
- Updates to placeholder worths

Version 2.31

- Further modifications to reasoning 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 repair!).
- Updates to placeholder worths

Version 2.1

- Updates to placeholder values.
- Added extra 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 provide a tutorial for using the design.
- 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 for financier to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 differentiate in between Valuations sections and Investment Returns areas.
- Adjusted return formulas to make dynamic 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 business realty. He has 20+ years of CRE experience and has underwritten over $30 billion in realty across leading institutional firms.