The subject of ground leases has shown up numerous times in the past few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the procedure of developing an Advanced Concepts Module for our property monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be an excellent time to share my Ground Lease Valuation Model in Excel.

This design can be utilized standalone, or contributed to your existing property-level model. In any case, it is handy for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. enhancements) relative to the fee basic interest (i.e. land).

Excel model 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 financier rents the land (i.e. ground) just. In the case of a ground lease, typically one celebration owns the land (i.e. fee basic interest) while a separate party owns the improvements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the enhancements for an extended amount of time (20 - 100 years)."

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 cost basic owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will usually own the improvements 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 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 enhancements thereon, to the land owner.

Ground leases prevail to prime areas, where landowners do not always wish to offer but where they might not have the knowledge (or desire) to operate. Thus, they lease the land to somebody who owns and operates the improvements on the land, and get a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of major cities.

Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, popular retail tenants prefer to develop and own their area however the developer does not necessarily want to offer the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own building on the leased land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of occupants that often accept 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 sections of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to permit you to place this design into your own property-level design to make it much easier to include a ground lease component 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 change log for the design, in addition to discover essential links related to the model.

The Ground Lease worksheet is separated into 7 sections as described and described listed below:

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

SF/M2 - In cell I3 get in whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It is common in property to append the name of the investment with (Ground Lease) to signify that the financial investment is for the cost 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 variety of acres or hectares will than immediately 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 assumed 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 circumstances, you may be thinking about obtaining the arrive at which a Target Superstore is constructed. Target owns the structure and is leasing the land for some extended amount of time. The total rentable area of the structure 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 are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. This must 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 start 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 upon the ground lease length, the design 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 usually amounts to the Next Ground Lease Payment date, although the design was built to permit for 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 event you're examining a much shorter hold period, just change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of the company regards to the ground lease, including payment amount, frequency, and rent boosts. This area includes five inputs plus the option to by hand design the lease payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for an annual or regular monthly payment. Lease Increase Method - The technique used to design rent boosts. This can either be: None - No lease increases. % Inc. - A percentage boost over the previous lease amount. $ Inc. - A quantity increase over the previous lease quantity. Custom - Manually design the lease payment amounts by year. If Custom is selected, the annual lease payment quantities in row 26 become inputs for you to by hand change (i.e. font turns blue). Important Note: If you select Custom and begin to alter the annual 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) area where you determine the reversion worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is broken up into three subsections, with five inputs and one optional input throughout the three 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 simply put, a typical direct cap assessment of a realty financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from renting 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 idea being to get to 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 cost (i.e. before inflation). Retenanting might consist of basic leasing expenses, it may consist of renovation and leasing, or it might consist of taking down the structure and rebuilding something brand-new. The idea is to get to a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Annually) - All of the above calculations are done before representing 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)' utilized as the reversion worth in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present value computation. It is determined by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a development rate. The worth is an optional input in case you want to tailor the reversion value.

Discount Rate - The discount rate at which to determine the present worth of the ground lease cash circulations. Think about this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section enables you to determine the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about 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 includes just one input.

Ground Lease Investment Cost - This is the expense to get land with a ground lease. It should include the acquisition cost, together with any other due diligence, closing, and pursuit costs connected to the investment.

After going into the Ground Lease Investment Cost, the area determines five 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 extremely depending on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering purchasing a ground lease and intend to finance the purchase, it is within this section where you can enter the debt assumptions, and see the matching return from that levered 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 amount.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the design presently only allows for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
  
  After getting in the debt presumptions for the ground lease financial investment, the section calculates 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 highly dependent on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will also heavily drive the levered return. And as a reminder, in the meantime the model just allows for financial obligation 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 numerous information validation lists are found. Unless you mean to modify the design, there is no factor to alter 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 have actually put together a brief video that strolls you through the various areas of the design. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  reference.com
  To make this design available to everyone, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your support helps keep the material coming - normal realty appraisal models cost $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 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 frequently update the model (see variation notes). Paid factors to the design receive a brand-new download link through email each time the model is upgraded.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying Start Guide' with updates and for improved readability
• Updates to placeholder values
• Fix to misspelled word on Version tab
  
  Version 2.32
  
  - Removed redundant information in E17: G17.
• Updated I22 to show more precise 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() 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 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 extra notes under 'Quick Start Guide' to clarify common confusion around start dates for different areas.
• 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 supply 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 evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between assessment 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 formatting to better distinguish in between Valuations areas and Investment Returns sections.
• 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 coworkers for commercial real estate. He has 20+ years of CRE experience and has underwritten over $30 billion in realty across leading institutional firms.