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 producing an Advanced Concepts Module for our property monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my Ground Lease Valuation Model in Excel.

This design can be utilized standalone, or included to your existing property-level model. In either case, it is practical for both landowners looking to size a ground lease payment or leasehold owners wanting to comprehend the worth of the leasehold (i.e. enhancements) relative to the fee simple interest (i.e. land).

Excel design for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the concepts 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 genuine estate investor rents the land (i.e. ground) just. When it comes to a ground lease, usually one party owns the land (i.e. fee basic interest) while a different celebration owns the improvements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the improvements for an extended amount of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the charge simple owner (lessor) of the land for a prolonged period 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 usage of the land, and any enhancements thereon, to the land owner.

Ground leases prevail to prime places, where landowners don't necessarily desire to sell however where they may 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 remain in retail shopping centers. Oftentimes, popular retail tenants prefer to build and own their area but the developer doesn't necessarily want to sell the land. So, the retail tenant will concur to lease the ground for 40+ years and build their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of renters that typically agree to this structure.

Quick Note: Not thinking about 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 consisted of on one worksheet. This is deliberate to allow you to insert this model into your own property-level model to make it simpler to include a ground lease part to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can view a modification log for the design, as well as discover essential links associated with the design.

The Ground Lease worksheet is broken up into seven areas as outlined and discussed listed below:

The Residential or commercial property Description section consists of five inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 get in 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 common in real estate to append the name of the financial investment with (Ground Lease) to signify that the financial 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 calculated in cell E6.
Leasehold Net Rentable Area - Total net rentable area 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. enhancements) to be owned by a different person or entity. So for example, you may be thinking about acquiring the arrive at which a Target Superstore is built. Target owns the structure and is renting the land for some prolonged amount of time. The total rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of four required 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 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 start through ground lease maturity. This is the total length of the ground lease, not the variety of years staying. The maximum length is 100 years. Based upon the ground lease length, the design then calculates 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 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 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 consists of the company regards to the ground lease, consisting of payment quantity, frequency, and lease boosts. This area consists of five inputs plus the choice to by hand design 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 monthly payment.
Lease Increase Method - The approach used to design rent boosts. This can either be: None - No rent boosts.
% Inc. - A percentage increase over the previous rent quantity.
$ Inc. - An amount increase over the previous rent quantity.
Custom - Manually model the rent payment quantities by year. If Custom is picked, the annual lease payment quantities in row 26 end up being inputs for you to manually 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) area where you determine the reversion worth of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into three subsections, with five inputs and one optional input throughout the three subsections.

Ground Lease Reversion Value - Within this subsection you model the value of the residential or commercial property as if there was no ground lease. Or to put it simply, a typical direct cap valuation of a real estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated from renting the enhancements, 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 here at a worth 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 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 expense (i.e. before inflation). Retenanting might include basic leasing expenses, it might include restoration and leasing, or it may include taking down 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 (Per Year) - All of the above computations 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 worth 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 expenses, and after that growing it by a development rate. The worth is an optional input in the event you desire to personalize the reversion worth.

Discount Rate - The discount rate at which to compute the present worth of the ground lease cash flows. Consider this discount rate as a difficulty rate (i.e. necessary 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 debt) 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 section consists of just one input.

Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It should 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 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 depending on the analysis duration, payment schedule, and reversion worth.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section enables you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease and intend to fund the purchase, it is within this section where you can go into the financial obligation assumptions, and see the matching 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 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 annually.

After entering the debt presumptions for the ground lease investment, the section determines five 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 extremely depending on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will also heavily drive the levered return. And as a suggestion, for now the design just allows for debt with interest-only payments and a balloon at the end of the analysis period.

Section 6 - Ground Lease Returns (Levered)

The final section is where backend inputs used in the various data validation lists are found. Unless you plan to modify the model, there is no reason to change the values in this section.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

In addition to the composed assistance above, I have actually put together a short video that strolls you through the different sections of the design. Note that this video is based upon v1.0 of the model.

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 optimum (your support assists keep the content coming - typical property appraisal models sell for $100 - $300+ per license). Just enter a rate together with an e-mail address to send 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 reach out to either Mike or Spencer.

We routinely update the design (see variation notes). Paid contributors to the model receive a brand-new download link by means of email each time the model is updated.

Version Notes

Version 2.33

- Rewrote 'Quick 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 precise years of term remaining.
- Updates to placeholder values

Version 2.31

- Further modifications 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 solve for problem 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 worths.
- Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for various sections.
- 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 'Quick Start Guide' to supply a tutorial for utilizing the design.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification functions.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable investor to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish 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 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 business realty. He has 20+ years of CRE experience and has financed over $30 billion in real estate across leading institutional companies.