The topic of ground leases has turned up several times in the past couple of 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 developing 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. Either method, it is handy for both landowners wanting to size a ground lease payment or leasehold owners looking to understand the worth of the leasehold (i.e. enhancements) relative to the charge simple interest (i.e. land).
Excel model for assessing a ground lease
What is a Ground Lease and Leasehold Interest?
If you not familiar with the ideas of and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:
Ground lease - "A lease structure where a genuine estate financier leases the land (i.e. ground) only. When it comes to a ground lease, typically one celebration owns the land (i.e. charge basic interest) while a separate party owns the improvements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the improvements for a prolonged duration of time (20 - 100 years)."
Leasehold Interest - "In realty, a leasehold interest refers to 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 duration of time. The lessee of a leasehold estate will generally own the improvements on the land and utilize 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 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 improvements thereon, to the land owner.
Ground leases are typical to prime locations, where landowners do not always want to sell however where they may not have the competence (or desire) to operate. Thus, they lease the land to someone who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this on a regular basis with workplace buildings 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 desire to sell the land. So, the retail renter will concur to lease the ground for 40+ years and construct their own building on the rented land. Banks, national restaurants in outparcels, and large outlet store are examples of tenants that typically consent to this structure.
Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling task.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to enable you to place this design into your own property-level design to make it simpler to include a ground lease element to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a modification log for the design, in addition to find crucial links associated with the design.
The Ground Lease worksheet is separated into seven areas as detailed and explained listed below:
The Residential or commercial property Description area includes five inputs associated to the 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 typical in genuine estate to add the name of the 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 country.
Land Size - Total SF or M2 of land. The number of acres or hectares will than instantly be computed 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 person or entity. So for example, you may be considering acquiring the arrive at which a Target Superstore is developed. Target owns the structure and is renting the land for some prolonged period of time. The overall 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 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 should 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 commencement through ground lease maturity. This is the total length of the ground lease, not the variety of years remaining. The maximum length is 100 years. Based on the ground lease length, the model then determines the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This normally amounts to the Next Ground Lease Payment date, although the model was constructed to enable for 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 analyzing a shorter hold duration, merely change the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms section includes the business regards to the ground lease, consisting of payment quantity, frequency, and rent boosts. This area consists of five inputs plus the choice to manually design the lease payment quantities.
Initial Payment Amount - The quantity of the 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 utilized to design rent increases. This can either be: None - No rent increases.
% Inc. - A percentage increase over the previous lease amount.
$ Inc. - An amount boost over the previous lease quantity.
Custom - Manually model the lease payment quantities by year. If Custom is selected, the yearly rent payment quantities in row 26 end up being inputs for you to by hand change (i.e. font turns blue). Important Note: If you pick Custom and begin to change the annual rent payment quantities 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) area where you compute the reversion worth 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 section 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 normal direct cap evaluation of a real estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed 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 consisted of. The idea being to reach a value 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 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 may include easy leasing expenses, it may consist of remodelling and leasing, or it might consist of taking apart the building and restoring something brand-new. The idea is to show up at a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Each Year) - All of the above estimations are done before accounting for inflation (i.e. growth). Enter a development 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 computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth computation. It is computed by taking the residential or commercial property worth internet of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in case you desire to personalize the reversion value.
Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Think about 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) section allows you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about buying a ground lease, it is within this section 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 acquire land with a ground lease. It needs to consist of the acquisition expense, together with any other due diligence, closing, and pursuit costs related to the investment.
After getting in the Ground Lease Investment Cost, the section calculates 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 duration, payment schedule, and reversion worth.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area enables you to calculate the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering acquiring a ground lease and intend to finance the purchase, it is within this area where you can enter the financial obligation assumptions, and see the corresponding return from that levered financial investment. The area includes 3 inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan amount. - Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the model currently just enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
After getting in the financial obligation assumptions for the ground lease 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 highly depending on the analysis duration, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a pointer, in the meantime the design just permits 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 various data recognition lists are discovered. Unless you mean to customize the design, there is no reason to change the values in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the composed guidance above, I've created a brief video that strolls you through the numerous sections of the model. Note that this video is based on v1.0 of the model.
Download the Ground Lease Valuation Model
To make this model available to everyone, it is used on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or maximum (your support helps keep the content coming - typical genuine estate assessment models cost $100 - $300+ per license). Just enter a cost together with an email 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 models on this basis, please connect to either Mike or Spencer.
We frequently upgrade the design (see variation notes). Paid contributors to the design receive a brand-new download link by means of e-mail each time the model 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 information in E17: G17. - Updated I22 to show more precise years of term staying.
- Updates to placeholder worths
Version 2.31
- Further revisions 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 resolve for issue 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 values. - 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 'Flying Start Guide' to provide a tutorial for utilizing the model.
- 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 investor to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in between evaluation and 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 separate in between Valuations areas 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 commercial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in genuine estate across top institutional firms.