The topic of 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 procedure of producing an Advanced Concepts Module for our genuine estate monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a good time to share my Ground Lease Valuation Model in Excel.

This model can be used standalone, or included to your existing property-level model. Either way, it is valuable for both landowners wanting to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. enhancements) relative to the charge basic interest (i.e. land).
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Excel model for assessing 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 meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where a real estate investor leases the land (i.e. ground) only. In the case of a ground lease, typically one celebration owns the land (i.e. cost easy interest) while a different party owns the improvements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the enhancements for an extended period of time (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest describes 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 use of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime places, where landowners do not always wish to offer but where they might not have the expertise (or desire) to operate. Thus, they rent the land to somebody who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of major cities.

Another case where you'll run into ground leases are in retail shopping centers. Oftentimes, prominent retail renters 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 leased land. Banks, national restaurants in outparcels, and large department shops are examples of occupants that typically concur to 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 included on one worksheet. This is intentional to permit you to place this model into your own property-level design to make it easier to include a ground lease part to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a change log for the model, in addition to discover essential links connected to the design.

The Ground Lease worksheet is broken up into seven sections as detailed and explained below:

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

SF/M2 - In cell I3 get in whether the step of size remains in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is common in property to append the name of the financial investment with (Ground Lease) to represent that the 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 automatically be calculated 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 person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate person or entity. So for example, you might be thinking about getting the arrive at which a Target Superstore is developed. Target owns the building and is leasing the land for some prolonged duration 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 section 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 began. This must 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 number of years staying. The optimum 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 typically is equal 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 occasion you're evaluating a shorter hold period, merely change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains the company regards to the ground lease, consisting of payment quantity, frequency, and lease increases. This section consists of 5 inputs plus the option to manually model the lease payment amounts.

Initial Payment Amount - The amount 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 method used to design rent increases. This can either be: None - No rent increases. % Inc. - A portion increase over the previous rent amount. $ Inc. - An amount increase over the previous lease quantity. Custom - Manually design the lease payment quantities 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 choose Custom and begin to change the yearly lease payment quantities 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 5 inputs and one optional input across 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 typical direct cap evaluation of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income originated from renting the improvements, unique 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 idea being to reach a value 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 improvements 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 simple leasing expenses, it may include remodelling and leasing, or it may include taking apart the building and restoring something 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 calculations are done before representing inflation (i.e. development). 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 estimation. It is calculated by taking the residential or commercial property worth web of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in the occasion you want to tailor the reversion worth.

Discount Rate - The discount rate at which to determine today value of the ground lease money flows. Think about this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) area enables you to determine the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering purchasing a ground lease, it is within this section 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 obtain land with a ground lease. It must include the acquisition expense, together with any other due diligence, closing, and pursuit expenses related to the investment.

After going into 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 highly based on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and mean 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 includes 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan quantity.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the design presently only permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
  
  After going into the debt 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
  
  Similar to the unlevered analysis, the resulting returns are extremely depending on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a pointer, in the meantime the model only enables financial obligation with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The final section is where backend inputs used in the numerous information validation lists are discovered. Unless you plan to modify the model, there is no reason to alter the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually put together a brief video that walks you through the various areas of the design. Note that this video is based upon v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this design accessible to everyone, it is used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance assists keep the material coming - normal realty valuation models offer for $100 - $300+ per license). Just go into 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 routinely upgrade the design (see variation notes). Paid contributors to the model get a new download link through email 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 information in E17: G17.
• Updated I22 to reflect more precise 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() range in the optional formula for 'Reversion Value' (I59) was missing 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 repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added extra notes under 'Quick 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 'Flying Start Guide' to provide a tutorial for using the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to allow for financier to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between evaluation and financial investment returns.
• Renamed 'Analysis Start Date' to 'Valuation Start Date', 'Analysis Period' to 'Valuation Period', and 'Analysis End' to 'Valuation End'.
• Updated heading formatting to much better differentiate in between Valuations sections and Investment Returns areas.
• Adjusted return formulas to make dynamic to Investment Hold Period
  
  Version 1.0
  century21.com
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for commercial genuine estate. He has 20+ years of CRE experience and has actually underwritten over $30 billion in realty throughout leading institutional firms.