The topic of ground leases has come up several times in the past couple of weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our realty 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 in Excel.

This design can be used standalone, or added to your existing property-level model. In either case, it is useful for both landowners aiming to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. improvements) relative to the charge easy 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 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, typically one celebration owns the land (i.e. cost simple interest) while a separate party owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the improvements for a prolonged duration of time (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest refers to a structure where an individual 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 normally 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 lease to the lessor for use of the land. At the end of the ground lease term, the lessee must return use of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime places, where landowners don't 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 runs the enhancements 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 encounter ground leases are in retail shopping mall. Oftentimes, prominent retail tenants prefer to construct and own their space however the developer does not necessarily desire to offer the land. So, the retail tenant will consent to rent the ground for 40+ years and build their own structure on the rented land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of tenants that typically consent to this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to handle your bespoke modeling job.

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to enable you to place this model into your own property-level design to make it simpler to include a ground lease element to your analysis.

All analysis is carried out 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 find important links connected to the design.

The Ground Lease worksheet is separated into seven areas as outlined and described listed below:

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

SF/M2 - In cell I3 enter whether the measure of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is typical in realty to add the name of the financial investment with (Ground Lease) to denote that the financial investment is for the cost 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 number of acres or hectares will than immediately be computed in cell E6. Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (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 different individual or entity. So for instance, you may be considering obtaining the arrive at which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged duration of time. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease began. This ought 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 start through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The optimum length is 100 years. Based on the ground lease length, the design then calculates the Ground Lease End Date (i.e. maturity date). Analysis Start Date - The month and year that the analysis is to start. This generally is equivalent to the Next Ground Lease Payment date, although the design was constructed to permit 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 evaluating a much shorter hold duration, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

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

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see listed below), this amount may be for an annual or monthly payment. Lease Increase Method - The technique utilized to design lease increases. This can either be: None - No lease boosts. % Inc. - A percentage boost over the previous rent amount. $ Inc. - A quantity boost over the previous lease amount. Custom - Manually design the lease payment amounts by year. If Custom is chosen, the annual lease payment quantities in row 26 end up being inputs for you to by hand change (i.e. font turns blue). Important Note: If you select Custom and begin to alter the yearly rent payment amounts in row 26, there is no other 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 determine the reversion value of the land (i.e. ground lease), today worth 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 across 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 in other words, a normal direct cap appraisal of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings originated 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 included. The concept being to reach 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 return the land plus any enhancements 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 basic leasing expenses, it might consist of restoration and leasing, or it may include taking down the building and rebuilding something brand-new. The concept is to get here at a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Per 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 get here at a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present value calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value calculation. It is determined by taking the residential or commercial property worth internet of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in case you want to personalize the reversion value.

Discount Rate - The discount rate at which to compute the present worth of the ground lease cash circulations. 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) section enables you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial 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 corresponding returns from that financial investment. The section consists of just one input.

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

After getting in 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 extremely based on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to compute the levered (i.e. with debt) returns of a ground lease investment. If you are considering purchasing a ground lease and plan to finance the purchase, it is within this area where you can enter the financial obligation assumptions, and see the corresponding 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 calculate the loan quantity.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the design currently only permits 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 financial obligation presumptions for the ground lease financial investment, the area computes 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 highly based on the analysis duration, payment schedule, and reversion value. The quantity and rate of the financial obligation will also greatly drive the levered return. And as a reminder, in the meantime the design just enables financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final area is where backend inputs used in the different data validation lists are discovered. Unless you mean to modify the design, there is no reason to alter the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually created a short video that strolls you through the various 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 everyone, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance assists keep the content coming - common realty assessment models cost $100 - $300+ per license). Just get in a rate 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 models on this basis, please reach out to either Mike or Spencer.
  
  We routinely upgrade the model (see variation notes). Paid factors to the design receive a new download link via 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 accurate years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further modifications to logic 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 solve 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 values.
• 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 provide a tutorial for utilizing 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' presumption to enable financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between valuation 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 much 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 industrial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate throughout leading institutional firms.
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