The topic of ground leases has actually come up several times in the previous few weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the process of producing an Advanced Concepts Module for our realty 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.
This design can be used standalone, or contributed to your existing property-level design. In any case, it is practical for both landowners seeking to size a ground lease payment or leasehold owners seeking to understand the value of the leasehold (i.e. enhancements) relative to the fee basic 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:
- "A lease structure where an investor rents the land (i.e. ground) only. When it comes to a ground lease, generally one party owns the land (i.e. charge easy interest) while a different party owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for an extended amount 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 charge simple owner (lessor) of the land for an extended duration of time. The lessee of a leasehold estate will generally own the improvements on the land and use the land and enhancements 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 usage 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 are typical to prime places, where landowners do not necessarily desire to sell but where they might not have the knowledge (or desire) to run. Thus, they lease the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this on a regular basis with office structures in the downtown core of significant cities.
Another case where you'll face ground leases are in retail shopping centers. Oftentimes, popular retail occupants choose to build and own their space but the designer does not necessarily wish 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 dining establishments in outparcels, and big department shops are examples of tenants that often consent to this structure.
Quick Note: Not interested in DIY analysis? Consider working 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 consisted of on one worksheet. This is deliberate to allow you to insert this design into your own property-level model to make it simpler to include a ground lease component to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can see a modification log for the model, along with discover essential links connected to the design.
The Ground Lease worksheet is broken up into 7 sections as detailed and explained listed below:
The Residential or commercial property Description area consists of five inputs related to the investment. These inputs are:
SF/M2 - In cell I3 go into whether the step of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is typical in property to add the name of the investment with (Ground Lease) to signify that the investment is for the fee simple 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 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 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 acquiring the arrive at which a Target Superstore is built. Target owns the building and is leasing the land for some extended amount of time. The total rentable area of the building is the 'Leasehold Net Rentable Area'.
Section 1 - Residential Or Commercial Property Description
The Investment Timing area includes 4 required 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 beginning through ground lease maturity. This is the overall length of the ground lease, not the variety of years staying. The optimum length is 100 years. Based on the ground lease length, the model then calculates the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This generally is equal to the Next Ground Lease Payment date, although the design was constructed to enable 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 occasion you're evaluating a shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms section contains the company terms of the ground lease, consisting of payment amount, frequency, and lease boosts. This area consists of five inputs plus the option to by hand design the lease payment quantities.
Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this amount may be for an annual or regular monthly payment.
Lease Increase Method - The approach utilized to model lease increases. This can either be: None - No rent boosts.
% Inc. - A portion increase over the previous lease amount.
$ Inc. - A quantity increase over the previous rent amount.
Custom - Manually model the lease payment quantities by year. If Custom is selected, the yearly rent payment quantities in row 26 become inputs for you to manually alter (i.e. font turns blue). Important Note: If you select Custom and start to alter the annual rent payment amounts 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), the present worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is broken up into 3 subsections, with five inputs and one optional input throughout the three subsections.
Ground Lease Reversion Value - Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a common direct cap appraisal of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income 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 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 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 may include remodelling and leasing, or it may include taking down the building and restoring 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 estimations are done before representing inflation (i.e. development). Enter a growth 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 value in the ground lease present worth estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth calculation. It is calculated by taking the residential or commercial property worth net of any retenanting expenses, and then growing it by a development rate. The value is an optional input in the event you want to tailor the reversion worth.
Discount Rate - The discount rate at which to calculate the present value of the ground lease cash flows. Consider this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) area enables you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about acquiring a ground lease, it is within this area 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 cost to obtain land with a ground lease. It needs to include the acquisition cost, together with any other due diligence, closing, and pursuit costs associated with the financial 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 highly based on the analysis duration, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area permits you to calculate the levered (i.e. with debt) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to fund the purchase, it is within this area 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 model will determine the loan amount.
- Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model presently just permits for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.
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
Just like the unlevered analysis, the resulting returns are highly reliant on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise 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 last area is where backend inputs utilized in the numerous information recognition lists are discovered. Unless you intend to modify the model, there is no reason to alter 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 put together a brief video that walks you through the various sections of the model. Note that this video is based on v1.0 of the design.
Download the Ground Lease Valuation Model
To make this design accessible to everybody, it is offered on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or optimum (your support helps keep the content coming - common realty assessment models cost $100 - $300+ per license). Just enter a rate 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 reach out to either Mike or Spencer.
We frequently upgrade the model (see version notes). Paid factors to the design get a new download link by means of email each time the model 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 reflect more accurate years of term staying.
- Updates to placeholder values
Version 2.31
- Further revisions to reasoning 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 issue 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 different 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 supply a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' assumption to permit investor to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 sections and Investment Returns areas.
- Adjusted return formulas to make vibrant 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 genuine estate. He has 20+ years of CRE experience and has financed over $30 billion in genuine estate throughout leading institutional companies.
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