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The topic of ground leases has actually turned up a number of times in the past couple of weeks. Numerous A. have actually 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 property financial 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 model. In either case, it is helpful for both landowners wanting to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).
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Excel model for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar 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 rents the land (i.e. ground) just. When it comes to a ground lease, usually one celebration owns the land (i.e. charge easy interest) while a separate celebration owns the improvements (i.e. leasehold interest). Most of the times, 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) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will usually own the enhancements on the land and utilize the land and improvements as if the lessee were the owner of the land. During the regard to the ground lease, the lessee will pay lease 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 locations, where landowners do not necessarily wish to sell but where they may not have the proficiency (or desire) to run. Thus, they rent the land to someone 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 workplace buildings in the downtown core of major cities.

Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, prominent retail occupants choose to construct and own their space however the designer does not necessarily desire to sell the land. So, the retail renter will accept rent the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and big department stores are examples of tenants that often consent to this structure.

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

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 place this model into your own property-level design to make it easier to add a ground lease part to your analysis.

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

The Ground Lease worksheet is broken up into 7 areas as detailed and explained listed below:

The Residential or commercial property Description area consists of 5 inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 go into whether the procedure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is typical in property to append the name of the financial investment with (Ground Lease) to represent 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 nation. 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 enhancements (i.e. the leasehold). The land is presumed to be owned by one person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for example, you might be thinking about getting the land on which a Target Superstore is built. Target owns the structure and is leasing the land for some extended time period. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and 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 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 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 typically 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 analyzing a shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes the business terms of the ground lease, consisting of payment amount, frequency, and lease boosts. This section includes 5 inputs plus the option to by hand model the rent payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see below), this amount might be for a yearly or month-to-month payment. Lease Increase Method - The method used to design rent boosts. This can either be: None - No lease increases. % Inc. - A portion increase over the previous rent quantity. $ Inc. - An amount increase over the previous lease amount. Custom - Manually model the rent payment quantities by year. If Custom is picked, the yearly rent payment quantities in row 26 become inputs for you to manually change (i.e. font style turns blue). Important Note: If you choose Custom and begin to change the annual rent payment amounts 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 determine the reversion value 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 section is separated into 3 subsections, with 5 inputs and one optional input throughout the three subsections.

Ground Lease Reversion Value - Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap valuation of a realty financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual 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 consisted of. 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 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 might consist of basic leasing expenses, it may include restoration and leasing, or it might include taking apart the building and rebuilding something brand-new. The idea is to get here at a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above calculations are done before representing inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to arrive at a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present worth computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth estimation. It is determined by taking the residential or commercial property value net of any retenanting costs, and after that growing it by a development rate. The value is an optional input in the occasion you want to customize the reversion worth.

Discount Rate - The discount rate at which to compute the present value of the ground lease capital. Consider 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) section allows you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering acquiring a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The section consists of simply one input.

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

After entering the Ground Lease Investment Cost, the section 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 depending on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area permits you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering buying a ground lease and plan to finance the purchase, it is within this area where you can go into the debt assumptions, and see the matching return from that levered financial investment. The area consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan amount.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the model currently only allows for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or yearly.
  
  After getting in the debt presumptions for the ground lease investment, the area calculates 5 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 period, payment schedule, and reversion value. The amount and rate of the financial obligation will also heavily drive the levered return. And as a suggestion, for now the model only enables 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 numerous data recognition lists are discovered. Unless you intend to customize the design, there is no reason to change the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I have actually assembled a short video that walks you through the numerous areas of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everyone, it is used on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or maximum (your assistance helps keep the content coming - common property assessment designs cost $100 - $300+ per license). Just enter a cost together with an email 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 designs on this basis, please reach out to either Mike or Spencer.
  
  We routinely update the model (see variation notes). Paid factors to the model get a new download link through e-mail each time the design is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying 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 show more precise years of term staying.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed issue where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing out on 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 values
  
  Version 2.1
  
  - Updates to placeholder values.
• 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 'Quick Start Guide' to provide a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to enable financier to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in 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 format to better separate 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 colleagues for commercial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in property throughout top institutional firms.