The topic of ground leases has shown up a number of times in the previous couple of 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 realty monetary 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.
This model can be used standalone, or added to your existing property-level model. In either case, it is handy for both landowners looking to size a ground lease payment or leasehold owners seeking to comprehend the value of the leasehold (i.e. improvements) relative to the interest (i.e. land).
Excel design for assessing a ground lease
What is a Ground Lease and Leasehold Interest?
If you unknown with the ideas 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 leases 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). Most of the times, the owner of the land leases the land to the owner of the enhancements for a prolonged period of time (20 - 100 years)."
Leasehold Interest - "In real estate, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for an extended period of time. The lessee of a leasehold estate will typically 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 must return use of the land, and any enhancements thereon, to the land owner.
Ground leases prevail to prime locations, where landowners do not always wish to sell but where they may not have the competence (or desire) to run. Thus, they rent the land to somebody who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this rather typically with workplace structures in the downtown core of major cities.
Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, popular retail renters choose to develop and own their space however the designer doesn't always want to offer the land. So, the retail tenant will consent to lease the ground for 40+ years and develop their own building on the rented land. Banks, national restaurants in outparcels, and large outlet store are examples of renters that frequently agree to this structure.
Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling project.
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 simpler to include a ground lease part to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a modification log for the model, as well as find essential links connected to the model.
The Ground Lease worksheet is separated into seven sections as outlined and discussed below:
The Residential or commercial property Description section consists of five 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 prevails in genuine estate to append the name of the financial investment with (Ground Lease) to represent that the 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 variety of acres or hectares will than immediately be determined in cell E6.
Leasehold Net Rentable Area - Total net rentable location 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 person or entity. So for example, you may be thinking about obtaining the arrive on which a Target Superstore is constructed. Target owns the structure and is leasing the land for some extended period 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 consists of four 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 started. This must 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 total length of the ground lease, not the number of years remaining. The maximum 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 begin. This typically amounts to the Next Ground Lease Payment date, although the design was built 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 examining a much 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 regards to the ground lease, consisting of payment amount, frequency, and rent increases. This area consists of 5 inputs plus the option to by hand design the lease payment quantities.
Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this amount may be for an annual or month-to-month payment.
Lease Increase Method - The approach utilized to design lease boosts. This can either be: None - No rent boosts.
% Inc. - A percentage increase over the previous lease amount.
$ Inc. - A quantity increase over the previous rent quantity.
Custom - Manually design the lease payment quantities by year. If Custom is picked, the annual lease payment amounts in row 26 become inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you pick Custom and begin to change the annual rent 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 worth 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 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 normal direct cap appraisal of a genuine estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings originated from renting 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 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 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 might include basic leasing costs, it might include renovation and leasing, or it may include taking down the building and reconstructing something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant.
Reversion Growth Rate (Annually) - All of the above computations 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)' utilized as the reversion worth in the ground lease present worth computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth computation. It is determined by taking the residential or commercial property worth 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 personalize the reversion worth.
Discount Rate - The discount rate at which to calculate the present worth of the ground lease capital. Think of this discount rate as an obstacle rate (i.e. necessary rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) area allows you to calculate 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 cost, and see the matching returns from that investment. The area includes simply one input.
Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It should include the acquisition cost, together with any other due diligence, closing, and pursuit expenses associated with the investment.
After entering the Ground Lease Investment Cost, the area calculates 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 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 compute the levered (i.e. with debt) returns of a ground lease investment. If you are considering purchasing a ground lease and intend to finance the purchase, it is within this section where you can go into the financial obligation assumptions, and see the corresponding return from that levered financial investment. The section includes 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 Interest Rate - The annual rate to be paid on the mortgage. Note that the design currently just permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or every year.
After going into the debt assumptions 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
Similar to the unlevered analysis, the resulting returns are extremely based on the analysis duration, payment schedule, and reversion value. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a reminder, for now the model just enables 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 section is where backend inputs utilized in the different information recognition lists are discovered. Unless you mean to modify the design, there is no factor to change the worths in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written assistance above, I've created a short video that walks you through the different areas of the model. Note that this video is based upon 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 (enter $0 if you 'd like) or optimum (your support helps keep the material coming - common realty evaluation designs sell for $100 - $300+ per license). Just get in a price together with an email 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 use our designs on this basis, please connect to either Mike or Spencer.
We regularly upgrade the model (see variation notes). Paid factors to the model receive a new download link by means of e-mail each time the design is updated.
Version Notes
Version 2.33
- Rewrote 'Flying Start Guide' with updates and for enhanced 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 remaining.
- Updates to placeholder values
Version 2.31
- Further modifications to reasoning in I59
Version 2.3
- Fixed problem where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing the last cell
Version 2.2
- Revised formula in M26: DG26 to resolve for issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!). - Updates to placeholder worths
Version 2.1
- Updates to placeholder values. - Added additional notes under 'Quick Start Guide' to clarify common 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 enhanced user experience. - Added a 'Flying Start Guide' to supply a tutorial for using 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 permit for financier to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate 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 better separate in between Valuations areas 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 commercial property. He has 20+ years of CRE experience and has financed over $30 billion in realty across leading institutional companies.
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