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Add Ground Lease Valuation Model (Updated Mar 2025).

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<br>The subject of [ground leases](https://oyomandcompany.com) has turned up a number of times in the previous couple of weeks. Numerous A.CRE readers have actually emailed to ask for a [purpose-built Ground](https://number1property.com) [Lease Valuation](https://vision-constructors.com) Model. And I remain in the process of developing an [Advanced Concepts](https://villa-piscine.fr) Module for our genuine estate monetary modeling Accelerator program covering the mechanics of [modeling ground](https://leasingangels.net) leases. So I thought now would be a great time to share my [Ground Lease](https://www.masercondosales.com) [Valuation Model](https://acerealty.com.my) in Excel.<br>
<br>This design can be used standalone, or contributed to your existing property-level design. Either way, it is useful for both [landowners](https://areafada.com) wanting to size a ground lease or [leasehold](https://ykrealyussuf.com) owners aiming to understand the value of the leasehold (i.e. enhancements) relative to the cost basic interest (i.e. land).<br>
<br>Excel model for assessing a ground lease<br>
<br>What is a Ground Lease and [Leasehold](https://vibes.com.ng) Interest?<br>
<br>If you [unknown](https://stayonrent.in) with the [principles](https://cyppro.com) of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our [Glossary](https://www.rentiranapartment.com) of CRE Terms:<br>
<br>Ground lease - "A lease structure where a genuine estate investor rents the land (i.e. ground) only. When it comes to a ground lease, typically one celebration owns the land (i.e. fee easy interest) while a different party owns the improvements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the enhancements for an extended duration of time (20 - 100 years)."<br>
<br>Leasehold Interest - "In realty, a leasehold interest refers to a structure where an individual or entity (lessee) rents 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 use 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 rent to the lessor for use of the land. At the end of the ground lease term, the lessee needs to return usage of the land, and any improvements thereon, to the land owner.<br>
<br>Ground leases prevail to prime places, where landowners do not necessarily wish to offer however where they may not have the proficiency (or desire) to run. Thus, they rent the land to someone who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this rather frequently with office buildings in the downtown core of major cities.<br>
<br>Another case where you'll run into ground leases remain in retail shopping centers. Oftentimes, popular retail tenants choose to build and own their area but the developer does not necessarily desire to sell the land. So, the retail tenant will consent to rent the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and large department shops are examples of tenants that typically accept this structure.<br>
<br>Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling task.<br>
<br>How to Use the Ground Lease Valuation Model<br>
<br>All sections of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to enable you to place this design into your own property-level model to make it easier to add a ground lease component to your analysis.<br>
<br>All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a change log for the model, as well as find essential links related to the model.<br>
<br>The Ground Lease worksheet is separated into seven areas as laid out and discussed listed below:<br>
<br>The Residential or commercial property Description area includes 5 inputs associated to the financial investment. These inputs are:<br>
<br>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 financial investment. It is common in real estate to add the name of the financial investment with (Ground Lease) to denote that the investment is for the charge 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 automatically be computed in cell E6.
Leasehold Net Rentable Area - Total net rentable location 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 separate person or entity. So for example, you may be thinking about getting the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some prolonged time period. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.<br>
<br>Section 1 - Residential Or Commercial Property Description<br>
<br>The Investment Timing section includes four needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and financial investment.<br>
<br>Ground Lease Start Date - The month and year when the ground lease began. This should 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 beginning 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 computes the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This typically amounts 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 event you're evaluating a shorter hold period, simply alter the orange font cell I17 to the preferred analysis end date.<br>
<br>Section 2 - Investment Timing<br>
<br>The Ground Lease Terms area includes the organization terms of the ground lease, consisting of payment quantity, frequency, and rent boosts. This section consists of five inputs plus the choice to manually design the lease payment amounts.<br>
<br>Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for an annual or monthly payment.
Lease Increase Method - The approach used to design lease increases. This can either be: None - No rent increases.
% Inc. - A percentage boost over the previous lease quantity.
$ Inc. - A quantity boost over the previous rent amount.
Custom - Manually model the rent payment quantities by year. If Custom is chosen, the yearly rent payment amounts in row 26 become inputs for you to manually change (i.e. typeface turns blue). Important Note: If you pick Custom and start to change the annual rent payment amounts in row 26, there is no way to revert back to another Lease Increase Method.<br>
<br>Section 3 - Ground Lease Terms<br>
<br>It is within the Valuation (Fee and Leasehold) section where you calculate the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is separated into three subsections, with 5 inputs and one optional input throughout the three subsections.<br>
<br>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 simply put, a common direct cap valuation of a property investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income 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 included. The idea being to come to a worth 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 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 include remodelling and leasing, or it might include tearing down the structure and restoring something brand-new. The concept is to reach 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 reach a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present worth estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth calculation. It is computed by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in the occasion you want to personalize the reversion value.<br>
<br>Discount Rate - The discount rate at which to compute today value of the ground lease capital. Consider this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease investment.<br>
<br>Section 4 - Valuation (Fee and Leasehold)<br>
<br>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 area where you can enter your acquisition/investment cost, and see the matching returns from that investment. The area consists of simply one input. <br>
<br>Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It should consist of the acquisition expense, together with any other due diligence, closing, and pursuit costs associated with the investment.<br>
<br>After going into the Ground Lease Investment Cost, the area computes five return metrics:<br>
<br>- Unlevered Internal Rate of Return
- Unlevered Equity Multiple
- Net Profit
Average Rate of Return
- Average Free-and-Clear Return<br>
<br>Note that the resulting returns are highly reliant on the analysis duration, payment schedule, and reversion value.<br>
<br>Section 5 - Ground Lease Returns (Unlevered)<br>
<br>The Ground Lease Returns (Levered) section allows you to compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about buying a ground lease and mean to fund the purchase, it is within this section where you can enter the debt presumptions, and see the corresponding return from that levered investment. The section includes 3 inputs.<br>
<br>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 Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently just enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or every year.<br>
<br>After going into the financial obligation assumptions for the ground lease investment, the section determines 5 return metrics:<br>
<br>- - Levered Internal Rate of Return
- Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return<br>
<br>Similar to 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 pointer, for now the design only allows for debt with interest-only payments and a balloon at the end of the analysis period.<br>
<br>Section 6 - Ground Lease Returns (Levered)<br>
<br>The final area is where backend inputs used in the various data recognition lists are discovered. Unless you intend to modify the design, there is no factor to change the worths in this area.<br>
<br>Section 7 - Data Validation<br>
<br>Video Walkthrough - Using the Ground Lease Valuation Model<br>
<br>In addition to the composed guidance above, I have actually created a short video that strolls you through the different sections of the design. Note that this video is based on v1.0 of the model.<br>
<br>Download the Ground Lease Valuation Model<br>
<br>To make this model available to everybody, it is used on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or optimum (your support helps keep the content coming - common real estate evaluation designs cost $100 - $300+ per license). Just get in a cost 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 reach out to either Mike or Spencer.<br>[housingauthority.gov.hk](https://www.housingauthority.gov.hk/tc/global-elements/contact-us/general-enquiries/index.html)
<br>We routinely upgrade the design (see version notes). Paid contributors to the model receive a new download link by means of email each time the design is updated.<br>
<br>Version Notes<br>[housingauthority.gov.hk](https://www.housingauthority.gov.hk/en/business-partnerships/resources/general-conditions-of-contract-for-capital-works/index.html)
<br>Version 2.33<br>
<br>- Rewrote 'Quick Start Guide' with updates and for enhanced readability
- Updates to placeholder values
- Fix to misspelled word on Version tab<br>
<br>Version 2.32<br>
<br>- Removed redundant details in E17: G17.
- Updated I22 to reflect more accurate years of term remaining.
- Updates to placeholder values<br>
<br>Version 2.31<br>
<br>- Further revisions to reasoning in I59<br>
<br>Version 2.3<br>
<br>- Fixed issue where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell<br>
<br>Version 2.2<br>
<br>- Revised formula in M26: DG26 to solve for concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
- Updates to placeholder worths<br>
<br>Version 2.1<br>
<br>- Updates to placeholder values.
- Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for various sections.
- Misc. formatting updates<br>
<br>Version 2.0<br>
<br>- Moved 'Analysis Start', 'Analysis Period', and 'Analysis End' inputs above Ground Lease dates for enhanced user experience.
- Added a 'Quick Start Guide' to provide a tutorial for utilizing 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 enable for investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between valuation 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 between Valuations areas and Investment Returns sections.
- Adjusted return solutions to make vibrant to Investment Hold Period<br>
<br>Version 1.0<br>
<br>- Initial release<br>
<br>About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for commercial realty. He has 20+ years of CRE experience and has underwritten over $30 billion in genuine estate throughout top institutional firms.<br>