The subject of ground leases has actually shown up numerous times in the past couple of weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the procedure of producing an Advanced Concepts Module for our real estate financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great time to share my Ground Lease Model in Excel.

This design can be used standalone, or added to your existing property-level model. In any case, it is valuable for both landowners looking to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. enhancements) relative to the cost basic interest (i.e. land).
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Excel model for examining 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 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, usually one party owns the land (i.e. cost basic interest) while a different celebration owns the improvements (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 duration of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the cost basic owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will generally own the improvements on the land and use the land and enhancements as if the lessee were the owner of the land. During the regard to 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 usage of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime places, where landowners don't necessarily wish to offer but where they may not have the knowledge (or desire) to operate. Thus, they lease the land to someone who owns and runs the improvements on the land, and receive a ground lease payment in return. You see this frequently with office complex in the downtown core of major cities.

Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, prominent retail renters prefer to construct and own their area but the designer doesn't always wish to sell the land. So, the retail occupant will agree to lease the ground for 40+ years and build their own building on the leased land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of tenants that frequently consent to this structure.

Quick Note: Not interested in DIY analysis? Consider dealing 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 included on one worksheet. This is intentional to allow you to place this design into your own property-level model to make it easier to include a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can see a change log for the model, as well as find important links associated with the model.

The Ground Lease worksheet is separated into seven sections as described and explained below:

The Residential or commercial property Description area includes 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 prevails in genuine estate to add the name of the financial investment with (Ground Lease) to signify that the investment is for the fee basic 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 variety 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 enhancements (i.e. the leasehold). The land is assumed 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 example, you might be considering acquiring the land on which a Target Superstore is constructed. 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 consists of four needed inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This should 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 beginning through ground lease maturity. This is the overall length of the ground lease, not the variety of years remaining. 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 begin. This typically amounts to the Next Ground Lease Payment date, although the model was built 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 examining a much shorter hold duration, just change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains business terms of the ground lease, consisting of payment quantity, frequency, and lease increases. This section includes 5 inputs plus the option to by hand design the lease payment quantities.

Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see listed below), this amount might be for an annual or regular monthly payment. Lease Increase Method - The technique utilized to design lease increases. This can either be: None - No lease increases. % Inc. - A percentage increase over the previous rent amount. $ Inc. - An amount increase over the previous lease quantity. Custom - Manually design the rent payment quantities by year. If Custom is chosen, the yearly lease payment quantities in row 26 end up being inputs for you to by hand alter (i.e. font turns blue). Important Note: If you choose Custom and start to alter the yearly lease payment amounts 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 calculate 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 area is broken up into three subsections, with 5 inputs and one optional input throughout 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 common direct cap assessment of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings obtained from leasing the improvements, unique 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 arrive at a worth 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 expense (i.e. before inflation). Retenanting may consist of simple leasing expenses, it might include renovation and leasing, or it may consist of taking apart the building and rebuilding something new. The idea is to get to a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Per Year) - All of the above calculations 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 worth in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value estimation. It is determined by taking the residential or commercial property value internet of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you wish to customize the reversion value.

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

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area allows you to calculate the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are considering acquiring a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the corresponding returns from that financial investment. The section includes simply one input.

Ground Lease Investment Cost - This is the expense to get 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 getting in 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 based on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about buying a ground lease and intend to finance the purchase, it is within this area where you can get in the debt assumptions, and see the corresponding return from that levered financial investment. The section consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will compute the loan quantity.
• Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model currently just permits for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.
  
  After entering the financial obligation assumptions for the ground lease investment, the area calculates 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 extremely depending on the analysis duration, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a tip, for now the design just permits for financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final section is where backend inputs utilized in the various data recognition lists are discovered. Unless you intend to modify the design, there is no reason to change the worths in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed guidance above, I've assembled a short video that strolls you through the numerous sections of the model. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this design available to everybody, 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 property evaluation models cost $100 - $300+ per license). Just enter a price together with an e-mail 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 frequently upgrade the model (see version notes). Paid factors to the model receive a brand-new download link via e-mail each time the design is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick 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 values
  
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed concern 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 concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added additional notes under 'Quick Start Guide' to clarify common 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 enhanced user experience.
• Added a 'Quick Start Guide' to offer a tutorial for utilizing 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' assumption to enable financier to analyze 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 formatting to much better distinguish in between Valuations areas and Investment Returns areas.
• Adjusted return solutions 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 industrial property. He has 20+ years of CRE experience and has actually financed over $30 billion in genuine estate across top institutional companies.
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