commit 6a77e64f3e1c56c6f82c3f9d70cf0ea742c8e565 Author: wilburnleventh Date: Tue Jun 17 04:49:22 2025 +0800 Add Ground Lease Valuation Model (Updated Mar 2025). diff --git a/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md b/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md new file mode 100644 index 0000000..5240812 --- /dev/null +++ b/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md @@ -0,0 +1,104 @@ +
The topic of ground leases has actually shown up numerous times in the past few weeks. Numerous A.CRE readers have actually [emailed](https://asmauburn.com) to ask for a purpose-built Ground Lease Valuation Model. And I'm in the process of producing an Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be an excellent time to share my [Ground Lease](https://propertybaajaar.com) Valuation Model in Excel.
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This model can be used standalone, or contributed to your existing property-level model. In either case, it is handy for both [landowners seeking](https://overseas-realestate.com) to size a ground lease payment or leasehold owners looking to [comprehend](https://estreladeexcelencia.com) the value of the leasehold (i.e. improvements) relative to the cost simple interest (i.e. land).
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Excel model for [assessing](https://ladygracebandb.com) a ground lease
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What is a Ground Lease and [Leasehold](https://www.22401414.com) Interest?
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If you with the ideas of [Ground Lease](https://seasiderealestate.al) and Leasehold Interest, I'll refer you to the [meanings](https://seedrealty.in) in our [Glossary](https://2c.immo) of CRE Terms:
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[Ground lease](https://elitehostels.co.ke) - "A lease structure where an investor leases the land (i.e. ground) just. When it comes to a ground lease, typically one celebration owns the land (i.e. cost easy interest) while a different celebration owns the improvements (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)."
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[Leasehold](https://galvanrealestateandservices.com) Interest - "In property, a leasehold interest describes a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will typically own the improvements on the land and utilize 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.
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Ground leases are typical to prime places, where landowners don't necessarily desire to offer however where they may not have the knowledge (or desire) to run. Thus, they rent the land to somebody who owns and runs 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 significant cities.
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Another case where you'll encounter ground leases are in retail shopping centers. Oftentimes, prominent retail renters prefer to build and own their area but the designer does not necessarily want to sell the land. So, the retail renter will consent to rent the ground for 40+ years and develop their own structure on the leased land. Banks, national restaurants in outparcels, and large outlet store are examples of occupants that often agree to this structure.
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Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling job.
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How to Use the Ground Lease Valuation Model
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All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to permit you to insert this model into your own property-level design to make it much easier to include a ground lease part to your analysis.
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All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can see a change log for the model, along with discover important links associated with the model.
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The Ground Lease worksheet is broken up into seven sections as detailed and explained below:
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The Residential or commercial property Description section includes five inputs related to the investment. These inputs are:
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SF/M2 - In cell I3 go into 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 prevails in realty to add the name of the financial investment with (Ground Lease) to represent that the investment is for the fee 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 instantly be determined 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a different person or entity. So for instance, you may be thinking about acquiring the arrive at which a Target Superstore is built. Target owns the building and is renting the land for some extended time period. The total rentable area of the building is the 'Leasehold Net Rentable Area'.
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Section 1 - Residential Or Commercial Property Description
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The Investment Timing area consists of four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and financial investment.
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Ground Lease Start Date - The month and year when the ground lease started. This ought 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 start through ground lease maturity. This is the total length of the ground lease, not the number of years staying. The optimum length is 100 years. Based upon 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 start. This typically amounts to the Next Ground Lease Payment date, although the design was built to permit for 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 case you're analyzing a shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.
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Section 2 - Investment Timing
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The Ground Lease Terms area includes the service terms of the ground lease, consisting of payment amount, frequency, and lease boosts. This area includes 5 inputs plus the alternative to manually model the rent payment quantities.
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Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this amount might be for an annual or monthly payment. +Lease Increase Method - The technique used to model lease increases. This can either be: None - No lease increases. +% Inc. - A percentage boost over the previous rent amount. +$ Inc. - An amount boost over the previous lease amount. +Custom - Manually model the lease payment amounts by year. If Custom is selected, the yearly lease payment quantities in row 26 become inputs for you to by hand change (i.e. font turns blue). Important Note: If you pick Custom and start to alter the yearly rent payment amounts in row 26, there is no chance to revert back to another Lease Increase Method.
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Section 3 - Ground Lease Terms
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It is within the Valuation (Fee and Leasehold) area where you compute the reversion worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is broken up into 3 subsections, with five inputs and one optional input throughout the three subsections.
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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 typical direct cap assessment of a real estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from leasing the enhancements, 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 get 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 may consist of basic leasing expenses, it may consist of remodelling and leasing, or it may include taking 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 (Per Year) - All of the above computations are done before accounting for inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to show up at a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present value computation. +Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth calculation. It is determined by taking the residential or commercial property value net of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in case you wish to tailor the reversion worth.
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Discount Rate - The discount rate at which to calculate today value of the ground lease money circulations. Think of this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease financial investment.
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Section 4 - Valuation (Fee and Leasehold)
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The Ground Lease Returns (Unlevered) section enables you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease 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 matching returns from that financial investment. The section consists of just one input.
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Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It ought to include the acquisition expense, together with any other due diligence, closing, and pursuit costs associated with the financial investment.
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After entering the Ground Lease Investment Cost, the section computes five return metrics:
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- Unlevered Internal Rate of Return +- Unlevered Equity Multiple +- Net Profit +Average Rate of Return +- Average Free-and-Clear Return
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Note that the resulting returns are highly based on the analysis duration, payment schedule, and reversion worth.
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Section 5 - Ground Lease Returns (Unlevered)
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The Ground Lease Returns (Levered) area enables you to calculate the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about acquiring a ground lease and mean to fund the purchase, it is within this section where you can go into the debt assumptions, and see the corresponding return from that levered investment. The section includes 3 inputs.
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Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan amount. +- Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently just enables an interest-only loan. +- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
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After entering the debt presumptions for the ground lease financial investment, the section determines 5 return metrics:
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- - Levered Internal Rate of Return +- Levered Equity Multiple +- Net Profit +- Average Rate of Return +- Average Cash-on-Cash Return
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Just like the unlevered analysis, the resulting returns are highly depending on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will also greatly drive the levered return. And as a reminder, in the meantime the model just enables debt with interest-only payments and a balloon at the end of the analysis duration.
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Section 6 - Ground Lease Returns (Levered)
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The last area is where backend inputs utilized in the various data validation lists are discovered. Unless you intend to modify the design, there is no reason to change the worths in this section.
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Section 7 - Data Validation
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Video Walkthrough - Using the Ground Lease Valuation Model
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In addition to the composed assistance above, I have actually assembled a brief video that strolls you through the different sections of the model. Note that this video is based upon v1.0 of the model.
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Download the Ground Lease Valuation Model
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To make this design available 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 helps keep the content coming - common realty assessment models cost $100 - $300+ per license). Just go into a cost together with an email address to send the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we provide our designs on this basis, please connect to either Mike or Spencer.
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We frequently upgrade the model (see version notes). Paid factors to the model get a brand-new download link via email each time the model is upgraded.
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Version Notes
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Version 2.33
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- Rewrote 'Quick Start Guide' with updates and for improved readability +- Updates to placeholder worths +- Fix to misspelled word on Version tab
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Version 2.32
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- Removed redundant information in E17: G17. +- Updated I22 to show more precise years of term staying. +- Updates to placeholder values
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Version 2.31
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- Further revisions to logic in I59
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Version 2.3
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- Fixed issue where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell
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Version 2.2
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- Revised formula in M26: DG26 to fix for issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!). +- Updates to placeholder worths
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Version 2.1
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- Updates to placeholder worths. +- Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for different areas. +- Misc. formatting updates
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Version 2.0
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- 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 utilizing the design. +- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information purposes. +- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'. +- Added 'Investment Term' presumption to enable investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between assessment and 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 distinguish in between Valuations sections and Investment Returns areas. +- Adjusted return solutions to make vibrant to Investment Hold Period
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Version 1.0
[galmangroup.com](https://galmangroup.com/property/plaza-apartments/) +
- Initial release
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About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for commercial real estate. He has 20+ years of CRE experience and has actually underwritten over $30 billion in realty throughout leading institutional firms.
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