The topic of ground leases has actually shown up numerous times in the past few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease . 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 believed now would be a great 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 seeking to size a ground lease payment or leasehold owners seeking to comprehend the worth of the leasehold (i.e. improvements) relative to the fee basic interest (i.e. land).
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Excel design for evaluating a ground lease
What is a Ground Lease and Leasehold Interest?
If you unknown 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 a genuine estate financier rents the land (i.e. ground) only. In the case of a ground lease, generally one party owns the land (i.e. charge simple interest) while a different party owns the enhancements (i.e. leasehold interest). In a lot of cases, the owner of the land rents the land to the owner of the enhancements for a prolonged duration of time (20 - 100 years)."
Leasehold Interest - "In real estate, a leasehold interest refers to a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the charge easy owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will usually own the improvements on the land and use the land and enhancements 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 must return usage of the land, and any enhancements thereon, to the land owner.
Ground leases are typical to prime areas, where landowners do not necessarily wish to offer but where they may not have the know-how (or desire) to operate. Thus, they rent the land to somebody 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 run into ground leases remain in retail shopping centers. Oftentimes, prominent retail renters prefer to develop and own their space but the designer does not necessarily want to offer the land. So, the retail occupant will concur to lease the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and large department shops 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 job.
How to Use the Ground Lease Valuation Model
All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to allow you to insert this model into your own property-level design to make it easier to add a ground lease component to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can see a modification log for the model, as well as discover essential links associated with the design.
The Ground Lease worksheet is broken up into seven sections as described and described below:
The Residential or commercial property Description area includes 5 inputs related to the financial 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 typical in property to append the name of the financial investment with (Ground Lease) to denote that the financial investment is for the charge 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 immediately be calculated in cell E6.
Leasehold Net Rentable Area - Total net rentable location 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 might be thinking about obtaining the arrive at which a Target Superstore is built. Target owns the building and is leasing the land for some extended time period. The overall rentable area 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 are related to the chronology of the ground lease and financial investment.
Ground Lease Start Date - The month and year when the ground lease began. This need to 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 total length of the ground lease, not the number of years staying. The optimum length is 100 years. Based on the ground lease length, the design 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 usually is equal to the Next Ground Lease Payment date, although the model was constructed to enable 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 occasion 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 contains the service regards to the ground lease, consisting of payment amount, frequency, and lease boosts. This section includes five inputs plus the option to manually design 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 regular monthly payment.
Lease Increase Method - The technique utilized to model rent increases. This can either be: None - No lease increases.
% Inc. - A portion boost over the previous rent quantity.
$ Inc. - An amount increase over the previous rent amount.
Custom - Manually model the rent payment quantities by year. If Custom is selected, the yearly lease payment quantities in row 26 become inputs for you to manually alter (i.e. font style turns blue). Important Note: If you pick Custom and begin to change the annual lease payment quantities in row 26, there is no method 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 value 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 across the three 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 realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained from leasing the enhancements, exclusive 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 come to a worth of the residential or commercial property before representing 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 basic leasing costs, it may consist of restoration and leasing, or it might consist of taking apart the structure and restoring something brand-new. The idea is to show up at a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Per Year) - All of the above computations are done before representing inflation (i.e. growth). Enter a growth 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 worth calculation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present value computation. It is computed by taking the residential or commercial property value internet of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in case you desire to customize the reversion value.
Discount Rate - The discount rate at which to calculate the present worth of the ground lease capital. Think of 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 allows you to compute the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are thinking about purchasing a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the matching returns from that financial investment. The area consists of just one input.
Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It needs to consist of the acquisition cost, together with any other due diligence, closing, and pursuit costs related to the investment.
After going into the Ground Lease Investment Cost, the area 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 based on the analysis period, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area enables you to calculate the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about acquiring a ground lease and plan to finance the purchase, it is within this section where you can enter the financial obligation presumptions, and see the corresponding 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 model will compute the loan quantity. - Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the design currently only enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or every year.
After getting in the debt assumptions for the ground lease investment, the area determines 5 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 extremely based on the analysis duration, payment schedule, and reversion value. The quantity and rate of the financial obligation will likewise greatly drive the levered return. And as a reminder, in the meantime the design just permits financial obligation with interest-only payments and a balloon at the end of the analysis duration.
Section 6 - Ground Lease Returns (Levered)
The last section is where backend inputs used in the different information validation lists are discovered. Unless you intend to customize the model, 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 created a brief video that strolls you through the different 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 accessible to everybody, it is offered on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or optimum (your assistance helps keep the content coming - normal property valuation designs cost $100 - $300+ per license). Just get in a cost together with an email address to send out 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 routinely upgrade the design (see variation notes). Paid factors to the design receive a new download link by means of e-mail each time the design is updated.
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 remaining.
- Updates to placeholder worths
Version 2.31
- Further revisions to logic in I59
Version 2.3
- Fixed issue 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 solve 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 worths. - Added additional notes under 'Quick Start Guide' to clarify typical confusion around start dates for various 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 offer a tutorial for utilizing the design.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable investor to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between appraisal 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 separate in between Valuations areas and Investment Returns sections.
- 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 real estate. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate across top institutional firms.