The subject of ground leases has actually shown up a number of times in the past few weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I’m in the process 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 Valuation Model in Excel.
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This design can be utilized standalone, or added to your existing property-level design. In either case, it is handy for both landowners wanting to size a ground lease payment or leasehold owners to understand the value of the leasehold (i.e. improvements) relative to the fee simple interest (i.e. land).

Excel model for examining 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 definitions in our Glossary of CRE Terms:

Ground lease - “A lease structure where an investor rents the land (i.e. ground) only. In the case of a ground lease, normally one party owns the land (i.e. charge basic interest) while a separate celebration 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 a prolonged time period (20 - 100 years).”

Leasehold Interest - “In realty, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge 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 enhancements as if the lessee were the owner of the land. During the term of 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 needs to return usage of the land, and any enhancements thereon, to the land owner.

Ground leases are typical to prime areas, where landowners don’t always want to sell but where they might not have the proficiency (or desire) to operate. Thus, they lease the land to someone who owns and operates the improvements on the land, and get a ground lease payment in return. You see this frequently with office complex in the downtown core of significant cities.

Another case where you’ll run into ground leases remain in retail shopping centers. Oftentimes, popular retail renters prefer to develop and own their area but the designer does not always want to sell the land. So, the retail renter will concur to rent the ground for 40+ years and build their own structure on the leased land. Banks, nationwide dining establishments in outparcels, and big department shops are examples of tenants that typically accept this structure.

Quick Note: Not interested in 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 allow you to place this model into your own property-level design to make it simpler to include a ground lease component to your analysis.

All analysis is carried out on the tab entitled ‘Ground Lease’. A ‘Version’ tab is also consisted of where you can see a modification log for the model, in addition to discover crucial links connected to the model.

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

The Residential or commercial property Description area includes five inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 enter whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It prevails in realty to add the name of the investment with (Ground Lease) to represent 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 nation. Land Size - Total SF or M2 of land. The variety of acres or hectares will than automatically be determined 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 individual or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for example, you might be considering acquiring the arrive on which a Target Superstore is built. Target owns the structure and is leasing the land for some extended time period. The total rentable location of the structure is the ‘Leasehold Net Rentable Area’.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of 4 needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease commenced. 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 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 on 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 begin. This normally amounts to the Next Ground Lease Payment date, although the model was constructed to permit 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 the event you’re evaluating a much shorter hold period, simply change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of the service regards to the ground lease, consisting of payment amount, frequency, and rent boosts. This area includes 5 inputs plus the option to by hand design the rent payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see listed below), this amount may be for a yearly or month-to-month payment. Lease Increase Method - The approach used to design rent increases. This can either be: None - No rent boosts. % Inc. - A portion increase over the previous rent quantity. $ Inc. - A quantity boost over the previous rent quantity. Custom - Manually model the lease payment quantities by year. If Custom is picked, the annual rent payment amounts in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you choose Custom and begin to alter the yearly 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 calculate the reversion value of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area 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 to put it simply, a normal direct cap assessment of a realty financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated from leasing the improvements, exclusive 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 idea being to come 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 expense (i.e. before inflation). Retenanting may include simple leasing expenses, it might include renovation and leasing, or it may include taking apart the structure and rebuilding something brand-new. The concept is to reach a ‘Net Reversion Value (Nominal)’ after accounting for the cost to retenant. Reversion Growth Rate (Per Year) - All of the above calculations are done before accounting for inflation (i.e. growth). Enter a development rate here, and the ‘Net Reversion Value (Nominal)’ will be grown to come to a ‘Reversion Value (Adjusted for Growth)’ utilized as the reversion worth in the ground lease present worth computation. 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 worth internet of any retenanting costs, and then growing it by a development rate. The value is an optional input in the event you wish to tailor the reversion worth.

Discount Rate - The discount rate at which to calculate 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) area allows you to compute the unlevered (i.e. before debt) 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 corresponding returns from that investment. The area consists of just one input.

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

After getting in the Ground Lease Investment Cost, the section 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 period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to determine the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering acquiring a ground lease and plan to fund the purchase, it is within this section where you can go into the financial obligation presumptions, and see the corresponding return from that levered investment. The area consists of 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will calculate the loan quantity.
• Annual Rate Of Interest - The yearly 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 month-to-month or yearly.
  
  After getting in the debt assumptions for the ground lease financial investment, the section computes five return metrics:
  
  - - Levered Internal Rate of Return
• Levered Equity Multiple
• Net Profit
• Average Rate of Return
• Average Cash-on-Cash Return
  
  Similar to the unlevered analysis, the resulting returns are highly dependent on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will also greatly drive the levered return. And as a suggestion, for now the model just allows for financial obligation with interest-only payments and a balloon at the end of the analysis period.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs used in the numerous information recognition lists are discovered. Unless you plan to customize the design, there is no reason to change the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I’ve assembled a short video that strolls you through the different areas of the design. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model available 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 material coming - typical property valuation designs offer for $100 - $300+ per license). Just get in a cost together with an e-mail 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 version notes). Paid contributors to the design receive a new download link by means of email each time the model 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 details in E17: G17.
• Updated I22 to show more accurate years of term remaining.
• 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 fix for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added additional notes under ‘Flying start Guide’ to clarify typical confusion around start dates for various areas.
• 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 utilizing the design.
• Renamed ‘Lease Increase Method’ to ‘Lease Payment Increase Method’ for clarification functions.
• Renamed ‘Ground Lease Reversion Value’ to ‘Current Fee Simple Value and Ground Lease Reversion Value’.
• Added ‘Investment Term’ assumption to enable investor to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed ‘Investment Timing’ to ‘Valuation Timing’ to distinguish in 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 format to much better separate between Valuations areas 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 coworkers for business property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate across top institutional companies.