The subject of ground leases has actually come up several times in the past 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 an excellent time to share my Ground Lease Valuation Model in Excel.
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This model can be utilized standalone, or included to your existing property-level design. Either way, it is helpful for both landowners looking to size a ground lease payment or leasehold owners seeking to comprehend the value of the leasehold (i.e. enhancements) relative to the charge easy interest (i.e. land).
Excel model for evaluating a ground lease
What is a Ground Lease and Leasehold Interest?
If you with the ideas 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 an investor leases the land (i.e. ground) just. In the case of a ground lease, generally one party owns the land (i.e. charge easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). In most cases, the owner of the land rents the land to the owner of the improvements for an extended time period (20 - 100 years)."
Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the fee easy owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will typically own the enhancements 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 use of the land, and any improvements thereon, to the land owner.
Ground leases are typical to prime areas, where landowners don't always wish to offer but where they might not have the competence (or desire) to operate. 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 on a regular basis with office complex in the downtown core of major cities.
Another case where you'll encounter ground leases remain in retail shopping mall. Oftentimes, popular retail renters prefer to construct and own their area but the developer does not always wish to offer the land. So, the retail occupant will agree to lease the ground for 40+ years and develop their own structure on the leased land. Banks, national dining establishments in outparcels, and large outlet store are examples of renters that typically consent to this structure.
Quick Note: Not thinking about DIY analysis? Consider working 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 deliberate to permit you to place this model into your own property-level design to make it simpler to add a ground lease component to your analysis.
All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the model, as well as find crucial links related to the design.
The Ground Lease worksheet is broken up into 7 areas as laid out and described below:
The Residential or commercial property Description area consists of 5 inputs related to the investment. These inputs are:
SF/M2 - In cell I3 enter 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 property to add the name of the investment with (Ground Lease) to represent that the investment is for the cost 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 number of acres or hectares will than automatically be determined 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. improvements) to be owned by a separate person or entity. So for example, you may be thinking about obtaining the land on which a Target Superstore is constructed. Target owns the structure and is leasing 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 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 began. This need to 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 commencement through ground lease maturity. This is the total length of the ground lease, not the number of years staying. The maximum length is 100 years. Based upon the ground lease length, the model 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 generally amounts to the Next Ground Lease Payment date, although the model was constructed 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 event you're evaluating a shorter hold period, merely alter the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area consists of the service terms of the ground lease, including payment quantity, frequency, and lease increases. This area includes 5 inputs plus the option to by hand design the rent payment amounts.
Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see listed below), this amount might be for a yearly or month-to-month payment.
Lease Increase Method - The method utilized to model lease boosts. This can either be: None - No rent increases.
% Inc. - A portion increase over the previous rent amount.
$ Inc. - An amount boost over the previous rent amount.
Custom - Manually design the lease payment amounts by year. If Custom is chosen, the annual rent payment amounts in row 26 end up being inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you select 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) section 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 throughout the 3 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 to put it simply, a typical direct cap appraisal of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income obtained 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 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 improvements 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 consist of basic leasing expenses, it might consist of renovation and leasing, or it may include taking apart the building and rebuilding something new. The concept is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant.
Reversion Growth Rate (Annually) - All of the above estimations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present worth computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present value calculation. It is computed by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in case you wish to customize the reversion value.
Discount Rate - The discount rate at which to compute the present worth of the ground lease capital. Think about this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease financial investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) area permits you to determine the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering buying a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The area includes just one input.
Ground Lease Investment Cost - This is the cost to obtain land with a ground lease. It needs to consist of the acquisition expense, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.
After getting in 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 highly 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 compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about purchasing a ground lease and intend to fund the purchase, it is within this area where you can get in the debt presumptions, and see the corresponding 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 amount. - Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the design currently only permits for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or annually.
After going into the debt presumptions 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
As with the unlevered analysis, the resulting returns are extremely dependent on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will likewise greatly drive the levered return. And as a tip, 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 utilized in the various data recognition lists are found. Unless you intend to modify the model, 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 composed assistance above, I've created a short video that strolls you through the numerous areas of the model. Note that this video is based upon v1.0 of the model.
Download the Ground Lease Valuation Model
To make this design available to everybody, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance helps keep the material coming - common property appraisal models offer for $100 - $300+ per license). Just go into a cost together with an email 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 designs on this basis, please reach out to either Mike or Spencer.
We regularly upgrade the design (see variation notes). Paid factors to the design get a new download link by means of email each time the design is upgraded.
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 remaining.
- Updates to placeholder values
Version 2.31
- Further modifications to reasoning in I59
Version 2.3
- Fixed problem 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 values
Version 2.1
- Updates to placeholder values. - Added extra notes under 'Flying start Guide' to clarify typical 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 offer a tutorial for using 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 allow for investor to evaluate returns on an Analysis Period much 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 format to better separate between Valuations sections and Investment Returns areas.
- 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 colleagues for industrial realty. He has 20+ years of CRE experience and has actually financed over $30 billion in genuine estate throughout leading institutional companies.
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