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The topic of ground leases has actually turned up a number of times in the past few weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of developing an Advanced Concepts Module for our genuine estate 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 design can be utilized standalone, or included to your existing property-level model. In any case, it is handy for both wanting to size a ground lease payment or leasehold owners wanting to comprehend the value of the leasehold (i.e. enhancements) relative to the cost basic interest (i.e. land).
Excel model 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 meanings in our Glossary of CRE Terms:
Ground lease - "A lease structure where an investor rents the land (i.e. ground) only. When it comes to a ground lease, usually one party owns the land (i.e. fee basic interest) while a different celebration owns the improvements (i.e. leasehold interest). In most cases, the owner of the land leases the land to the owner of the enhancements for a prolonged time period (20 - 100 years)."
Leasehold Interest - "In property, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge simple owner (lessor) of the land for an extended period of time. The lessee of a leasehold estate will typically own the improvements 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 improvements thereon, to the land owner.
Ground leases are common to prime locations, where landowners don't necessarily want to offer but where they might not have the know-how (or desire) to run. Thus, they lease the land to someone who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this on a regular basis with office structures in the downtown core of major cities.
Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, popular retail renters choose to build and own their space however the designer does not necessarily wish to sell the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own building on the rented land. Banks, nationwide dining establishments in outparcels, and big department shops are examples of tenants that frequently concur to this structure.
Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling project.
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 allow you to insert this design into your own property-level model to make it simpler to include a ground lease element to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a modification log for the model, as well as discover important links associated with the model.
The Ground Lease worksheet is broken up into seven sections as laid out and explained below:
The Residential or commercial property Description section consists of five inputs related to the financial investment. These inputs are:
SF/M2 - In cell I3 enter whether the procedure of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It prevails in realty to append the name of the financial investment with (Ground Lease) to signify that the financial investment is for the charge simple 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 automatically be determined 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. improvements) to be owned by a separate person or entity. So for circumstances, you may be considering acquiring the arrive on which a Target Superstore is built. Target owns the structure and is leasing the land for some extended 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 belong to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease commenced. This must 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 commencement through ground lease maturity. This is the overall length of the ground lease, not the number of years remaining. The optimum length is 100 years. Based on 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 generally amounts to the Next Ground Lease Payment date, although the model was constructed to permit 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 occasion you're evaluating a shorter hold period, merely alter the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area consists of the service regards to the ground lease, including payment quantity, frequency, and rent increases. This section includes five inputs plus the choice to by hand model the lease payment amounts.
Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for a yearly or regular monthly payment.
Lease Increase Method - The method used to design rent increases. This can either be: None - No rent boosts.
% Inc. - A portion boost over the previous rent quantity.
$ Inc. - A quantity boost over the previous rent amount.
Custom - Manually model the lease payment quantities by year. If Custom is picked, 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 yearly 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 compute the reversion worth of the land (i.e. ground lease), the present 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 across the 3 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 in other words, a common direct cap appraisal of a real estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived 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 reach 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 cost (i.e. before inflation). Retenanting may include simple leasing expenses, it might consist of remodelling and leasing, or it might include tearing down the structure and restoring something brand-new. The idea is to get to a 'Net Reversion Value (Nominal)' after representing the cost to retenant.
Reversion Growth Rate (Per Year) - All of the above calculations are done before accounting for inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present value computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value estimation. It is computed by taking the residential or commercial property value net of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in the event you desire to personalize the reversion worth.
Discount Rate - The discount rate at which to compute today worth of the ground lease money circulations. Consider this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) section permits you to determine the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering purchasing a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the corresponding returns from that financial investment. The section includes simply one input.
Ground Lease Investment Cost - This is the cost to get land with a ground lease. It needs to include the acquisition expense, together with any other due diligence, closing, and pursuit expenses connected to the investment.
After getting in 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 determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering purchasing a ground lease and intend to finance 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 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 amount. - Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently only enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or each year.
After entering the financial obligation assumptions for the ground lease 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
Just like the unlevered analysis, the resulting returns are extremely based on the analysis duration, payment schedule, and reversion value. The amount and rate of the debt will also greatly drive the levered return. And as a tip, in the meantime 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 final area is where backend inputs used in the various information validation lists are found. Unless you intend to modify the design, there is no factor to alter the worths in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written assistance above, I've assembled a short video that strolls you through the different areas of the model. Note that this video is based on v1.0 of the model.
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 (get in $0 if you 'd like) or maximum (your assistance helps keep the material coming - normal genuine estate valuation designs 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 concerns about our "Pay What You're Able" program or why we provide our models on this basis, please reach out to either Mike or Spencer.
We routinely upgrade the design (see version notes). Paid factors to the design get a new download link via e-mail each time the model is upgraded.
Version Notes
Version 2.33
- Rewrote 'Flying Start Guide' with updates and for enhanced readability - Updates to placeholder values
- 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 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 solve 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 'Quick 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 'Flying Start Guide' to provide a tutorial for using the design.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable for investor to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish between assessment and 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 better differentiate 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 commercial realty. He has 20+ years of CRE experience and has underwritten over $30 billion in property across top institutional firms.