The topic of ground leases has come up numerous times in the past few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the procedure of producing an Advanced Concepts Module for our genuine estate 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 used standalone, or contributed to your existing property-level design. Either method, it is practical for both landowners looking to size a ground lease payment or leasehold owners seeking to understand the worth of the leasehold (i.e. improvements) relative to the cost simple interest (i.e. land).
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Excel design for examining a ground lease
What is a Ground Lease and Leasehold Interest?
If you not familiar with the 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, usually one party owns the land (i.e. fee basic interest) while a separate celebration 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 a prolonged time period (20 - 100 years)."
Leasehold Interest - "In real estate, a leasehold interest describes a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the cost basic owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will generally own the improvements on the land and use the land and improvements 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 usage of the land, and any improvements thereon, to the land owner.
Ground leases are typical to prime areas, where landowners do not necessarily desire to offer however where they might not have the knowledge (or desire) to operate. Thus, they rent the land to someone who owns and runs the improvements on the land, and get a ground lease payment in return. You see this frequently with workplace structures in the downtown core of significant cities.
Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, prominent retail tenants prefer to construct and own their space however the developer does not necessarily wish to offer the land. So, the retail occupant will accept lease the ground for 40+ years and construct their own building on the rented land. Banks, nationwide restaurants in outparcels, and big department shops are examples of renters that often agree to this structure.
Quick Note: Not interested in DIY analysis? Consider dealing 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 included on one worksheet. This is intentional to enable you to insert this model into your own property-level model to make it easier to include a ground lease element to your analysis.
All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a modification log for the design, in addition to find crucial links related to the model.
The Ground Lease worksheet is separated into 7 sections as detailed and described below:
The Residential or commercial property Description section consists of 5 inputs associated to the financial investment. These inputs are:
SF/M2 - In cell I3 enter whether the procedure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It prevails in real estate to append the name of the investment with (Ground Lease) to signify that the financial investment is for the cost simple 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 different individual or entity. So for example, you might be thinking about acquiring the arrive on which a Target Superstore is developed. Target owns the building and is renting the land for some extended time period. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.
Section 1 - Residential Or Commercial Property Description
The Investment Timing area consists of four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease began. This should 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 start 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 upon the ground lease length, the model 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 usually amounts to the Next Ground Lease Payment date, although the design was developed to permit 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 analyzing a shorter hold period, simply alter the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms section consists of the business terms of the ground lease, consisting of payment quantity, frequency, and rent boosts. This area includes five inputs plus the choice to manually model the rent payment quantities.
Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for a yearly or regular monthly payment.
Lease Increase Method - The method used to design lease increases. This can either be: None - No lease boosts.
% Inc. - A portion increase over the previous rent quantity.
$ Inc. - A quantity increase over the previous rent quantity.
Custom - Manually model the lease payment quantities by year. If Custom is picked, the yearly rent payment quantities in row 26 end up being inputs for you to manually alter (i.e. font turns blue). Important Note: If you select Custom and start to alter the annual lease payment amounts in row 26, there is no chance 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 value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is separated into 3 subsections, with 5 inputs and one optional input across the 3 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 assessment of a realty financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived 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 included. The concept being to get to 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 enhancements 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 consist of remodelling and leasing, or it may include tearing down the structure and restoring something brand-new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for 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 value in the ground lease present value calculation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth calculation. It is calculated 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 event you want to tailor the reversion worth.
Discount Rate - The discount rate at which to determine the present worth of the ground lease money 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 allows you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering buying a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the corresponding returns from that financial 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 consist of the acquisition expense, together with any other due diligence, closing, and pursuit expenses connected to the investment.
After getting in the Ground Lease Investment Cost, the section computes 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 depending on the analysis period, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) section allows you to determine the levered (i.e. with debt) returns of a ground lease financial 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 debt presumptions, and see the matching return from that levered 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 determine the loan quantity. - Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model currently just 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 entering the debt presumptions for the ground lease financial investment, the area determines 5 return metrics:
- - Levered Internal Rate of Return - Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return
As with the unlevered analysis, the resulting returns are highly based on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will also greatly drive the levered return. And as a pointer, in the meantime the model only enables debt with interest-only payments and a balloon at the end of the analysis duration.
Section 6 - Ground Lease Returns (Levered)
The final area is where backend inputs used in the numerous data validation lists are found. Unless you mean to customize the model, there is no reason to alter the worths in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written guidance above, I've assembled a short video that walks you through the different sections of the design. Note that this video is based on v1.0 of the design.
Download the Ground Lease Valuation Model
To make this design available to everybody, it is provided on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or maximum (your support helps keep the material coming - typical real estate appraisal designs cost $100 - $300+ per license). Just get in a rate together with an email address to send out the download link to, and after that click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our designs on this basis, please connect to either Mike or Spencer.
We regularly update the design (see variation notes). Paid contributors to the design get 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 improved readability - Updates to placeholder values
- 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 staying.
- Updates to placeholder values
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 the last cell
Version 2.2
- Revised formula in M26: DG26 to fix for concern 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 worths. - 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 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 information purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable for investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between appraisal 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 format to better distinguish 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 commercial real estate. He has 20+ years of CRE experience and has financed over $30 billion in genuine estate throughout top institutional companies.