The topic of ground leases has come up numerous times in the previous couple of weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our genuine 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.

This model can be utilized standalone, or added to your existing property-level model. In either case, it is practical for both landowners aiming to size a ground lease payment or leasehold owners looking to comprehend the value of the leasehold (i.e. improvements) relative to the fee 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 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) only. In the case of a ground lease, usually one celebration owns the land (i.e. fee basic interest) while a different celebration owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the enhancements for an extended time period (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 cost basic owner (lessor) of the land for a prolonged time period. 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 usage of the land. At the end of the ground lease term, the lessee needs to return use of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners don't always want to offer but where they may not have the proficiency (or desire) to operate. Thus, they rent the land to someone who owns and operates the improvements on the land, and get a ground lease payment in return. You see this rather often with office complex in the downtown core of major cities.

Another case where you'll run into ground leases remain in retail shopping centers. Oftentimes, popular retail tenants choose to construct and own their space but the developer does not necessarily wish to sell the land. So, the retail occupant will consent to lease the ground for 40+ years and construct their own building on the rented land. Banks, nationwide dining establishments in outparcels, and large outlet store are examples of tenants that frequently consent to 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 intentional to allow you to insert this model into your own property-level design to make it easier to add a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the design, as well as find essential links associated with the design.

The Ground Lease worksheet is broken up into seven sections as laid out and discussed below:

The Residential or commercial property Description area includes 5 inputs associated to the financial 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 financial investment. It prevails in property to add the name of the financial investment with (Ground Lease) to signify 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 country.
Land Size - Total SF or M2 of land. The number of acres or hectares will than instantly 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 presumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate person or entity. So for circumstances, you might be thinking about acquiring the arrive on which a Target Superstore is developed. Target owns the structure and is renting the land for some prolonged time period. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section includes four needed inputs and one optional inputs. These inputs relate to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. 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 start through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The maximum 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 normally amounts to the Next Ground Lease Payment date, although the model was constructed to enable 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 evaluating a much shorter hold duration, merely change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of the business terms of the ground lease, including payment quantity, frequency, and lease increases. This section includes five inputs plus the alternative to by hand model the rent payment quantities.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for an annual or monthly payment.
Lease Increase Method - The method used to design rent increases. This can either be: None - No lease increases.
% Inc. - A portion boost over the previous rent amount.
$ Inc. - A quantity increase over the previous lease amount.
Custom - Manually model the lease payment amounts 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 choose Custom and begin to alter the yearly rent 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) section where you compute the reversion value 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 common direct cap appraisal of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings 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 included. The concept being to get here 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 enhancements 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 might include restoration and leasing, or it may consist of tearing down the structure and restoring something new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant.
Reversion Growth Rate (Annually) - 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 get to a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present worth estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth estimation. It is computed by taking the residential or commercial property worth net of any retenanting costs, and after that growing it by a development rate. The value is an optional input in the occasion you desire to tailor the reversion worth.

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

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area permits you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering buying 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 cost to get land with a ground lease. It should include the acquisition cost, together with any other due diligence, closing, and pursuit costs associated with the financial investment.

After entering the Ground Lease Investment Cost, the area calculates 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 reliant on the analysis duration, payment schedule, and reversion worth.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section allows you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and mean to finance the purchase, it is within this area where you can go into the debt presumptions, and see the matching return from that levered financial investment. The section includes three inputs.

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will calculate the loan quantity.
- Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the design presently just enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.

After getting in the financial obligation assumptions for the ground lease 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

Similar to the unlevered analysis, the resulting returns are highly dependent on the analysis period, payment schedule, and reversion value. The amount and rate of the debt will likewise greatly drive the levered return. And as a reminder, for now the model only permits 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 various information validation lists are found. Unless you intend to modify 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 assistance above, I've assembled a short video that walks you through the numerous areas of the design. Note that this video is based upon v1.0 of the model.

Download the Ground Lease Valuation Model

To make this design available to everyone, it is used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance helps keep the material coming - typical property evaluation designs sell for $100 - $300+ per license). Just go into a price together with an e-mail address to send 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 models on this basis, please reach out to either Mike or Spencer.

We routinely upgrade the model (see version notes). Paid contributors to the model receive a brand-new download link by means of email each time the model is updated.

Version Notes

Version 2.33

- Rewrote 'Flying Start Guide' with updates and for enhanced 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 staying.
- Updates to placeholder worths

Version 2.31

- Further revisions to logic in I59

Version 2.3

- Fixed problem where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing out on the last cell

Version 2.2

- Revised formula in M26: DG26 to fix for issue 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 various areas.
- 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 'Quick Start Guide' to supply 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 permit for investor to analyze returns on an Analysis Period 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 much 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 coworkers for business genuine estate. He has 20+ years of CRE experience and has underwritten over $30 billion in realty throughout top institutional firms.