The topic of ground leases has shown up several times in the previous 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 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 a great time to share my Ground Lease Valuation Model in Excel.
This design can be utilized standalone, or contributed to your existing property-level model. Either method, it is useful for both landowners wanting to size a ground lease payment or leasehold owners seeking to comprehend the worth of the leasehold (i.e. improvements) relative to the interest (i.e. land).
Excel design for assessing a ground lease
What is a Ground Lease and Leasehold Interest?
If you not familiar 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 financier rents the land (i.e. ground) only. When it comes to a ground lease, generally one party owns the land (i.e. fee basic interest) while a separate celebration owns the improvements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the enhancements for a prolonged time period (20 - 100 years)."
Leasehold Interest - "In property, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge basic owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will usually own the enhancements 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 lease 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 enhancements thereon, to the land owner.
Ground leases are common to prime places, where landowners do not always want to sell but where they might not have the competence (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 on a regular basis with workplace structures in the downtown core of major cities.
Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, popular retail renters prefer to construct and own their area however the developer doesn't always wish to offer the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own structure on the leased land. Banks, nationwide dining establishments in outparcels, and big outlet store are examples of occupants that frequently accept this structure.
Quick Note: Not thinking about DIY analysis? Consider dealing 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 consisted of on one worksheet. This is intentional to allow you to insert this model into your own property-level model to make it much easier to add a ground lease component to your analysis.
All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the model, along with find essential links related to the model.
The Ground Lease worksheet is separated into 7 areas as detailed and discussed listed below:
The Residential or commercial property Description area includes five inputs associated to the financial investment. These inputs are:
SF/M2 - In cell I3 go into whether the step of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is typical in genuine estate to add the name of the investment with (Ground Lease) to signify that the investment is for the fee simple 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 computed in cell E6.
Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (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 thinking about obtaining the land on which a Target Superstore is built. Target owns the building 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 section consists of 4 needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and financial investment.
Ground Lease Start Date - The month and year when the ground lease commenced. This must 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 model then calculates the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This normally amounts to the Next Ground Lease Payment date, although the model was constructed 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 case you're analyzing a much shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area contains the service regards to the ground lease, including payment quantity, frequency, and rent boosts. This area includes five inputs plus the alternative to by hand design the lease payment amounts.
Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this quantity may be for an annual or monthly payment.
Lease Increase Method - The technique used to model rent increases. This can either be: None - No lease increases.
% Inc. - A portion increase over the previous lease amount.
$ Inc. - A quantity increase over the previous lease amount.
Custom - Manually model the rent payment quantities by year. If Custom is selected, the yearly rent payment amounts in row 26 end up being inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you select Custom and start 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 compute 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 section is separated into 3 subsections, with five inputs and one optional input across 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 common direct cap assessment of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income originated from leasing the enhancements, 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 idea being to arrive at a value 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 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 might consist of simple leasing costs, it may consist of restoration and leasing, or it might include taking apart the structure and restoring something new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant.
Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get here at 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 worth computation. It is determined by taking the residential or commercial property worth net of any retenanting costs, and after that growing it by a growth rate. The worth is an optional input in the occasion you want to customize the reversion value.
Discount Rate - The discount rate at which to compute today worth of the ground lease money circulations. Consider this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial 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 investment. If you are considering acquiring 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 just one input.
Ground Lease Investment Cost - This is the expense to get land with a ground lease. It must consist of the acquisition expense, together with any other due diligence, closing, and pursuit costs connected to the financial investment.
After going into 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 extremely depending on the analysis duration, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area enables you to calculate 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 financial obligation presumptions, and see the corresponding return from that levered investment. The section consists of 3 inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will calculate the loan amount. - Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the design currently just allows for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.
After entering the debt presumptions for the ground lease investment, the section computes 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 highly based on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will also greatly drive the levered return. And as a suggestion, for now the design only permits debt with interest-only payments and a balloon at the end of the analysis period.
Section 6 - Ground Lease Returns (Levered)
The final area is where backend inputs utilized in the different information recognition lists are discovered. Unless you intend to customize the design, there is no factor to alter the values in this section.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written guidance above, I have actually put together a short video that strolls you through the numerous sections of the design. Note that this video is based upon v1.0 of the design.
Download the Ground Lease Valuation Model
To make this design accessible to everyone, it is offered on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or maximum (your assistance assists keep the content coming - common realty appraisal designs sell 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 models on this basis, please reach out to either Mike or Spencer.
We routinely upgrade the model (see version notes). Paid factors to the model get a brand-new download link through e-mail each time the model is updated.
Version Notes
Version 2.33
- Rewrote 'Flying Start Guide' with updates and for enhanced readability - Updates to placeholder worths
- 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 worths
Version 2.31
- Further modifications to reasoning in I59
Version 2.3
- Fixed issue where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing out on the last cell
Version 2.2
- Revised formula in M26: DG26 to fix for problem 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 common confusion around start dates for different 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 'Flying Start Guide' to provide a tutorial for using the model.
- 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' assumption to allow for financier to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between assessment 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 formatting to better separate in between Valuations areas and Investment Returns sections.
- Adjusted return solutions to make dynamic to Investment Hold Period
Version 1.0
quora.com
- Initial release
About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for commercial genuine estate. He has 20+ years of CRE experience and has financed over $30 billion in property across leading institutional companies.