The subject of ground leases has actually shown up several times in the past couple of weeks. Numerous A.CRE readers have actually emailed to request for 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 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 model. In any case, it is useful for both landowners looking to size a ground lease payment or leasehold owners looking to understand the value of the leasehold (i.e. enhancements) relative to the cost simple 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 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 an investor rents the land (i.e. ground) just. In the case of a ground lease, normally one party owns the land (i.e. charge basic interest) while a separate party owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the improvements for a prolonged amount of time (20 - 100 years)."
Leasehold Interest - "In realty, a leasehold interest refers to a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the cost simple owner (lessor) of the land for an extended duration of time. The lessee of a leasehold estate will generally own the enhancements on the land and utilize 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 needs to return use of the land, and any improvements thereon, to the land owner.
Ground leases prevail to prime locations, 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 runs 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 mall. Oftentimes, prominent retail tenants choose to build and own their space but the developer does not necessarily desire to sell the land. So, the retail renter will accept rent the ground for 40+ years and construct their own building on the rented land. Banks, nationwide restaurants in outparcels, and big department stores are examples of tenants that typically consent to this structure.
Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to handle your bespoke modeling project.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to allow you to place this design into your own property-level model to make it simpler to include a ground lease part to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can view a change log for the design, in addition to find essential links associated with the design.
The Ground Lease worksheet is separated into seven sections as outlined and described listed below:
The Residential or commercial property Description section includes five inputs related to the financial investment. These inputs are:
redflagdeals.com
SF/M2 - In cell I3 go into whether the procedure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in genuine estate to append the name of the financial investment with (Ground Lease) to represent that the financial investment is for the charge basic 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 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 person or entity, and the leasehold interest (i.e. enhancements) to be owned by a different individual or entity. So for example, you may be considering acquiring the arrive on which a Target Superstore is developed. Target owns the structure and is leasing the land for some extended time period. 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 relate to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease began. 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 beginning through ground lease maturity. This is the overall 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 determines the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This typically is equal to the Next Ground Lease Payment date, although the design was constructed to enable 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 duration, just change the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
redflagdeals.com
The Ground Lease Terms section contains business regards to the ground lease, consisting of payment amount, frequency, and lease boosts. This area includes 5 inputs plus the choice to by hand 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 might be for a yearly or regular monthly payment.
Lease Increase Method - The technique utilized to design lease boosts. This can either be: None - No lease increases.
% Inc. - A portion boost over the previous lease amount.
$ Inc. - An amount increase over the previous lease quantity.
Custom - Manually model the lease payment amounts by year. If Custom is selected, the yearly lease payment amounts in row 26 become inputs for you to manually change (i.e. typeface turns blue). Important Note: If you select Custom and start to alter the yearly lease payment amounts in row 26, there is no method to revert back to another Lease Increase Method.
Section 3 - Ground Lease Terms
It is within the Valuation (Fee and Leasehold) section 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 value of the leasehold interest. This section is broken up into three 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 simply put, a normal direct cap evaluation of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained 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 concept 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 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 may include simple leasing expenses, it might include restoration and leasing, or it may include taking down the building and restoring something brand-new. The concept is to get here at a 'Net Reversion Value (Nominal)' after representing the cost to retenant.
Reversion Growth Rate (Each 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 get to 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 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 then 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 determine the present value of the ground lease capital. Think about this discount rate as a difficulty rate (i.e. required rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) section permits you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about acquiring 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 section includes just one input.
Ground Lease Investment Cost - This is the cost to get land with a ground lease. It needs to include the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.
After getting in the Ground Lease Investment Cost, the area calculates 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 highly depending on the analysis period, payment schedule, and reversion worth.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area allows you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about buying a ground lease and mean to finance the purchase, it is within this section where you can go into the debt presumptions, and see the matching return from that levered investment. The area consists of 3 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 Rates Of Interest - The annual rate to be paid on the mortgage. Note that the model presently only permits 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 debt presumptions for the ground lease financial investment, the area calculates 5 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 period, payment schedule, and reversion value. The quantity and rate of the financial obligation will also heavily drive the levered return. And as a tip, in the meantime the model just permits for financial obligation with interest-only payments and a balloon at the end of the analysis period.
Section 6 - Ground Lease Returns (Levered)
The last area is where backend inputs used in the different data validation lists are discovered. Unless you intend to customize the design, there is no reason to change the worths in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written assistance above, I've assembled a brief video that walks you through the different areas of the design. Note that this video is based on v1.0 of the design.
Download the Ground Lease Valuation Model
To make this model available to everyone, it is provided on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or optimum (your assistance assists keep the material coming - typical property valuation models cost $100 - $300+ per license). Just go into a cost together with an e-mail address to send out the download link to, and after that 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 routinely upgrade the design (see version notes). Paid factors to the design get a brand-new download link via email each time the model is upgraded.
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 details in E17: G17. - Updated I22 to show more accurate years of term staying.
- Updates to placeholder worths
Version 2.31
- Further revisions 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 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 'Quick Start Guide' to supply 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' assumption to permit financier to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish 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 sections and Investment Returns sections.
- 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 colleagues for business property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in realty throughout top institutional companies.