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The subject of ground leases has shown up several times in the previous couple of weeks. Numerous A.CRE readers have emailed to ask for a Lease Valuation Model. And I'm in the procedure of producing an Advanced Concepts Module for our realty monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my Ground Lease Valuation Model in Excel.

This model can be used standalone, or contributed to your existing property-level model. In either case, it is useful for both landowners looking to size a ground lease payment or leasehold owners looking to comprehend the worth of the leasehold (i.e. enhancements) relative to the charge easy interest (i.e. land).

Excel design for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown 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 a genuine estate investor leases the land (i.e. ground) just. When it comes to a ground lease, generally one party owns the land (i.e. fee simple interest) while a different party owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land leases the land to the owner of the enhancements for an extended time period (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest refers to a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the cost basic owner (lessor) of the land for an extended amount of time. The lessee of a leasehold estate will typically own the improvements on the land and use the land and improvements 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 usage of the land, and any improvements thereon, to the land owner.

Ground leases prevail to prime places, where landowners do not necessarily wish to sell but where they might not have the proficiency (or desire) to operate. Thus, they lease the land to someone 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 workplace structures in the downtown core of major cities.

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, prominent retail occupants choose to build and own their area however the designer doesn't always want to offer the land. So, the retail occupant will accept rent the ground for 40+ years and develop their own building on the rented land. Banks, nationwide dining establishments in outparcels, and big department shops are examples of tenants that typically consent to this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling job.

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 easier 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 see a modification log for the model, in addition to discover essential links related to the model.

The Ground Lease worksheet is separated into 7 sections as described and described below:

The Residential or commercial property Description area includes 5 inputs associated to the financial investment. These inputs are:

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 prevails in realty to append the name of the investment with (Ground Lease) to represent that the investment is for the cost easy 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 immediately 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 assumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a different person or entity. So for example, you may be considering acquiring the land on which a Target Superstore is developed. Target owns the structure and is renting the land for some extended period 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 section consists of four required inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This should also 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 start through ground lease maturity. This is the overall length of the ground lease, not the variety of years remaining. The optimum 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 start. This normally amounts to the Next Ground Lease Payment date, although the model was developed to enable 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 occasion you're examining a much shorter hold duration, just change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes business terms of the ground lease, including payment quantity, frequency, and rent increases. This area includes five inputs plus the alternative to manually model the lease payment amounts.

Initial Payment Amount - The quantity of the 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 approach used to design rent increases. This can either be: None - No rent boosts. % Inc. - A portion increase over the previous rent amount. $ Inc. - A quantity boost over the previous rent amount. Custom - Manually design the rent payment quantities by year. If Custom is selected, the yearly rent payment quantities in row 26 become inputs for you to manually alter (i.e. font turns blue). Important Note: If you pick Custom and begin to alter the annual lease payment amounts 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 determine the reversion value of the land (i.e. ground lease), the present worth 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 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 normal direct cap evaluation of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income stemmed from leasing the enhancements, special 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 get to 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 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 cost (i.e. before inflation). Retenanting may include simple leasing expenses, it might include remodelling and leasing, or it may consist of tearing down the building and reconstructing something brand-new. The idea is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. Reversion Growth Rate (Each Year) - All of the above calculations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present value calculation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth estimation. It is determined by taking the residential or commercial property value internet of any retenanting costs, and then growing it by a development rate. The value is an optional input in the event you want to tailor the reversion worth.

Discount Rate - The discount rate at which to compute today worth of the ground lease cash flows. Think about 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 allows you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial 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 corresponding returns from that financial investment. The area includes simply one input.

Ground Lease Investment Cost - This is the expense to get 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 going into the Ground Lease Investment Cost, the section calculates 5 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 reliant on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area enables you to determine the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about purchasing a ground lease and plan to fund the purchase, it is within this section where you can go into the financial obligation assumptions, and see the corresponding return from that levered financial investment. The section consists of three 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 Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently only enables an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or yearly.
  
  After entering the debt assumptions for the ground lease financial investment, the area computes five 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 extremely based on the analysis duration, payment schedule, and reversion value. The amount and rate of the debt will likewise greatly drive the levered return. And as a suggestion, in the meantime the model only permits debt with interest-only payments and a balloon at the end of the analysis duration.
  
  Section 6 - Ground Lease Returns (Levered)
  
  The last area is where backend inputs used in the different information validation lists are found. Unless you plan to modify the design, there is no reason to change the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written assistance above, I've created a short video that strolls you through the various areas of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this design available to everyone, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or maximum (your assistance helps keep the content coming - common real estate appraisal models cost $100 - $300+ per license). Just enter a cost together with an email address to send 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 offer our designs on this basis, please reach out to either Mike or Spencer.
  
  We frequently update the model (see version notes). Paid contributors to the design receive a new download link by means of e-mail each time the design 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 reflect more accurate years of term staying.
• Updates to placeholder values
  
  Version 2.31
  
  - Further revisions to reasoning in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to resolve for concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder worths
  
  Version 2.1
  
  - Updates to placeholder values.
• Added additional notes under 'Flying 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 'Flying Start Guide' to offer a tutorial for utilizing the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' assumption to permit financier to examine returns on an Analysis Period much 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 formatting to much better distinguish between Valuations sections and Investment Returns areas.
• Adjusted return formulas to make vibrant to Investment Hold Period
  
  Version 1.0
  reddit.com
  - Initial release
  
  About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for industrial property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in property across leading institutional companies.