The subject of ground leases has actually turned up numerous times in the past few weeks. A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the process of creating an Advanced Concepts Module for our property 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 included to your existing property-level model. In any case, it is practical for both landowners looking to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. improvements) relative to the fee easy interest (i.e. land).
Excel model for assessing a ground lease
What is a Ground Lease and Leasehold Interest?
If you unknown with the concepts 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 an investor rents the land (i.e. ground) just. In the case of a ground lease, typically one party owns the land (i.e. fee easy 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 period of time (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 cost easy owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will generally own the enhancements 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 rent to the lessor for usage of the land. At the end of the ground lease term, the lessee should return use of the land, and any improvements thereon, to the land owner.
Ground leases prevail to prime areas, where landowners don't always want to offer but where they might not have the expertise (or desire) to operate. Thus, they lease the land to someone who owns and runs the enhancements on the land, and get a ground lease payment in return. You see this frequently with office structures in the downtown core of significant cities.
Another case where you'll encounter ground leases are in retail shopping centers. Oftentimes, popular retail occupants choose to develop and own their space but the developer does not necessarily wish to sell the land. So, the retail occupant will accept rent the ground for 40+ years and develop their own building on the leased land. Banks, nationwide dining establishments in outparcels, and large outlet store are examples of tenants that frequently consent to this structure.
Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling task.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to enable you to place this model into your own property-level model to make it much easier to add 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 view a modification log for the model, along with discover crucial links associated with the design.
The Ground Lease worksheet is broken up into seven areas as outlined 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 measure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in property to add the name of the financial investment with (Ground Lease) to denote that the financial investment is for the fee basic 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 immediately be computed 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 different person or entity. So for circumstances, you may be thinking about getting the land on which a Target Superstore is built. Target owns the building and is leasing the land for some prolonged 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 includes four needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease commenced. This need to also 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 remaining. The optimum length is 100 years. Based upon 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 start. This generally amounts to the Next Ground Lease Payment date, although the model was constructed to enable 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 shorter hold period, just change the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms section includes business terms of the ground lease, consisting of payment amount, frequency, and rent boosts. This section includes five inputs plus the choice to manually design the rent payment amounts.
Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this amount may be for a yearly or monthly payment.
Lease Increase Method - The method used to design lease boosts. This can either be: None - No rent boosts.
% Inc. - A portion increase over the previous lease quantity.
$ Inc. - A quantity boost over the previous rent amount.
Custom - Manually design the lease payment amounts by year. If Custom is chosen, the annual rent payment amounts in row 26 become inputs for you to by hand alter (i.e. font turns blue). Important Note: If you choose Custom and start 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) 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 section 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 to put it simply, a typical direct cap appraisal of a genuine estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income originated from renting the enhancements, 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 reach 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 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 might include easy leasing costs, it might include renovation and leasing, or it may include taking apart the building and rebuilding something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Annually) - All of the above computations are done before representing inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach 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 worth utilized in the ground lease present worth estimation. It is determined by taking the residential or commercial property value net of any retenanting expenses, and after that growing it by a growth rate. The worth is an optional input in the occasion you want to customize the reversion worth.
Discount Rate - The discount rate at which to compute the present value of the ground lease money circulations. Think about this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) section allows you to calculate the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the corresponding returns from that investment. The section consists of simply one input.
Ground Lease Investment Cost - This is the cost to acquire 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 financial investment.
After getting in the Ground Lease Investment Cost, the area computes 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 highly reliant on the analysis period, payment schedule, and reversion worth.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with financial obligation) returns of a ground lease financial 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 matching return from that levered financial investment. The area includes 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 Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model 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 every year.
After getting in the financial obligation presumptions 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
Similar to the unlevered analysis, the resulting returns are extremely depending on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will also heavily drive the levered return. And as a tip, for now the design only permits debt 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 numerous data validation lists are discovered. Unless you mean to customize the model, there is no factor to change the values in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the composed assistance above, I've created a short video that strolls you through the numerous sections of the design. Note that this video is based upon v1.0 of the model.
Download the Ground Lease Valuation Model
To make this model available to everyone, it is provided on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your assistance helps keep the content coming - normal real estate valuation designs cost $100 - $300+ per license). Just go into 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 designs on this basis, please connect to either Mike or Spencer.
We routinely upgrade the model (see version notes). Paid factors to the design receive a new download link through e-mail each time the design is upgraded.
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 show more accurate years of term staying.
- Updates to placeholder worths
Version 2.31
- Further modifications to reasoning 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 resolve 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 values. - Added extra notes under 'Quick Start Guide' to clarify typical confusion around start dates for different 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 supply 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 allow for financier to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 format to much better differentiate in between Valuations sections and Investment Returns areas.
- Adjusted return solutions 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 industrial real estate. He has 20+ years of CRE experience and has financed over $30 billion in realty across leading institutional companies.