The subject of ground leases has actually turned up several times in the previous few weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the process of producing an Advanced Concepts Module for our realty 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 design can be utilized standalone, or contributed to your existing property-level design. Either method, it is practical for both landowners seeking to size a ground lease payment or leasehold owners to comprehend the worth of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).

Excel design for evaluating 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 definitions in our Glossary of CRE Terms:

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

Leasehold Interest - "In realty, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will normally 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 should return use of the land, and any improvements thereon, to the land owner.

Ground leases are common to prime places, where landowners don't necessarily wish to offer however where they may not have the know-how (or desire) to operate. Thus, they rent the land to somebody who owns and operates the improvements on the land, and get a ground lease payment in return. You see this frequently with workplace buildings in the downtown core of major cities.

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, popular retail occupants prefer to construct and own their space but the developer doesn't necessarily wish to sell the land. So, the retail occupant will consent to lease the ground for 40+ years and construct their own structure on the leased land. Banks, national dining establishments in outparcels, and big department shops are examples of occupants that often accept this structure.

Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling project.

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to permit you to insert this design into your own property-level model to make it much easier to add 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 connected to the model.

The Ground Lease worksheet is separated into seven areas as outlined and described listed below:

The Residential or commercial property Description section consists of 5 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 typical in realty to add the name of the financial investment with (Ground Lease) to denote that the financial investment is for the cost easy 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 variety of acres or hectares will than automatically 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 presumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different person or entity. So for instance, you may be considering acquiring the arrive at which a Target Superstore is built. Target owns the structure and is leasing the land for some prolonged amount of time. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes 4 needed 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 started. This ought to likewise be the month and year of the very 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 number 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 typically is equal to the Next Ground Lease Payment date, although the design 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 alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes the company regards to the ground lease, including payment quantity, frequency, and lease increases. This section includes 5 inputs plus the option 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 technique utilized to design lease increases. This can either be: None - No lease increases. % Inc. - A portion boost over the previous rent amount. $ Inc. - An amount increase over the previous lease amount. Custom - Manually model the lease payment amounts by year. If Custom is chosen, the annual rent payment quantities in row 26 end up being inputs for you to manually alter (i.e. font turns blue). Important Note: If you choose Custom and start to alter 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 determine the reversion value 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 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 model 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 realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income derived 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 idea being to reach 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 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 expenses, it might consist of restoration and leasing, or it might consist of taking down the structure and rebuilding something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Per Year) - All of the above calculations are done before accounting for inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value estimation. It is determined by taking the residential or commercial property worth net of any retenanting costs, and after that growing it by a growth rate. The worth is an optional input in the occasion you desire to tailor the reversion value.

Discount Rate - The discount rate at which to determine the present worth of the ground lease cash circulations. Consider this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section enables you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about buying a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the corresponding returns from that financial investment. The area includes just one input.

Ground Lease Investment Cost - This is the expense to get land with a ground lease. It should include the acquisition expense, together with any other due diligence, closing, and pursuit expenses associated with the financial investment.

After going into the Ground Lease Investment Cost, the section determines 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 extremely dependent on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to calculate the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering buying a ground lease and mean to fund the purchase, it is within this section where you can get in the debt presumptions, and see the matching return from that levered investment. The area consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will calculate the loan quantity.
• Annual Rate Of Interest - The annual 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 financial obligation assumptions for the ground lease investment, the section calculates 5 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 depending on the analysis duration, 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)
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  The last section is where backend inputs utilized in the numerous information recognition lists are found. Unless you intend to customize the model, there is no reason to alter the worths in this section.
  
  Section 7 - Data Validation
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  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the composed assistance above, I have actually put together a brief video that strolls you through the different sections of the model. Note that this video is based upon v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model accessible to everyone, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or optimum (your support helps keep the content coming - common realty appraisal designs cost $100 - $300+ per license). Just get in a rate together with an email 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 designs on this basis, please connect to either Mike or Spencer.
  
  We routinely update the model (see version notes). Paid contributors to the design get a 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 values
• Fix to misspelled word on Version tab
  
  Version 2.32
  
  - Removed redundant information in E17: G17.
• Updated I22 to show more accurate years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to logic in I59
  
  Version 2.3
  
  - Fixed concern where the OFFSET() range 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 repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder worths.
• Added extra notes under 'Flying start Guide' to clarify common confusion around start dates for different 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 'Flying Start Guide' to offer a tutorial for using the design.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to permit investor to evaluate returns on an Analysis Period 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 better separate in between Valuations areas and Investment Returns sections.
• Adjusted return solutions 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 real estate. He has 20+ years of CRE experience and has underwritten over $30 billion in realty across leading institutional companies.