The subject of ground leases has turned up several times in the previous few weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a good time to share my Ground Lease Valuation Model in Excel.

This design can be utilized standalone, or added to your existing property-level design. In either case, it is useful for both landowners looking to size a ground lease payment or leasehold owners looking to comprehend the value of the (i.e. improvements) relative to the cost basic interest (i.e. land).
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Excel model for examining a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar 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 real estate financier leases the land (i.e. ground) just. When it comes to a ground lease, normally one celebration owns the land (i.e. fee easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for a prolonged duration of time (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the fee easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will generally own the enhancements on the land and use the land and enhancements 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 must return use of the land, and any enhancements thereon, to the land owner.

Ground leases are common to prime places, where landowners do not necessarily desire to offer but where they may not have the competence (or desire) to run. Thus, they lease the land to somebody who owns and operates the improvements on the land, and get a ground lease payment in return. You see this rather typically with workplace structures in the downtown core of significant cities.

Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, popular retail renters prefer to develop and own their space but the designer does not necessarily desire to offer the land. So, the retail renter will concur to lease the ground for 40+ years and build their own structure on the rented land. Banks, national restaurants in outparcels, and large department shops are examples of renters that typically accept this structure.

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

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 enable you to insert this design into your own property-level model to make it easier to include a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a modification log for the model, along with discover crucial links connected to the model.

The Ground Lease worksheet is separated into seven sections as described and discussed listed below:

The Residential or commercial property Description section includes five inputs related to the financial investment. These inputs are:

SF/M2 - In cell I3 get in whether the measure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It is common in realty to append the name of the investment with (Ground Lease) to signify that the investment is for the charge basic interest in land with a ground lease. Address - Address, city, state/province, zip/postal code, and country. Land Size - Total SF or M2 of land. The number of acres or hectares will than immediately be calculated 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. enhancements) to be owned by a different individual or entity. So for circumstances, you might be thinking about obtaining the land on which a Target Superstore is developed. Target owns the structure and is leasing the land for some prolonged time period. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of four required inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease began. This must 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 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 generally is equal to the Next Ground Lease Payment date, although the model was constructed to permit 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 event you're analyzing a much shorter hold duration, just change the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes business terms of the ground lease, consisting of payment quantity, frequency, and rent increases. This section consists of five inputs plus the alternative to by hand model the lease payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this quantity may be for a yearly or monthly payment. Lease Increase Method - The approach used to model lease boosts. This can either be: None - No lease boosts. % Inc. - A percentage increase over the previous rent quantity. $ Inc. - An amount increase over the previous rent amount. Custom - Manually model the rent payment amounts by year. If Custom is picked, the yearly rent payment amounts in row 26 end up being inputs for you to by hand change (i.e. font style turns blue). Important Note: If you select Custom and begin to change the yearly 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 calculate the reversion value 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 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 worth of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap valuation of a genuine estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained 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 here at a value 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 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 easy leasing expenses, it might include renovation and leasing, or it might include taking apart the building and restoring something brand-new. The idea is to reach a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Annually) - 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)' used as the reversion worth in the ground lease present value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth computation. It is computed by taking the residential or commercial property worth internet of any retenanting costs, and then growing it by a growth rate. The value is an optional input in case you desire to tailor the reversion worth.

Discount Rate - The discount rate at which to determine today worth of the ground lease capital. Think about 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) area enables you to calculate the unlevered (i.e. before debt) 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 expense, and see the matching returns from that financial investment. The area includes simply one input.

Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It should include the acquisition expense, together with any other due diligence, closing, and pursuit costs associated with the investment.

After getting in the Ground Lease Investment Cost, the area computes 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 depending on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section permits you to determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering acquiring a ground lease and plan to fund the purchase, it is within this section where you can get in the debt presumptions, and see the matching return from that levered investment. The section includes 3 inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will compute the loan quantity.
• Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the design presently just permits an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
  
  After going into the debt presumptions 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
  
  Similar to the unlevered analysis, the resulting returns are extremely depending on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a suggestion, for now the design only 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 final area is where backend inputs utilized in the numerous information validation lists are found. Unless you intend to modify the design, there is no reason to alter the values in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I've put together a brief video that walks you through the numerous areas of the design. Note that this video is based upon v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model available to everybody, it is offered on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your support assists keep the content coming - typical real estate appraisal models cost $100 - $300+ per license). Just go into a cost together with an e-mail address to send the download link to, and after that click 'Continue'. If you have any questions 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 regularly upgrade the model (see version notes). Paid contributors to the model get a brand-new download link through e-mail each time the model is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Quick 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 show more precise years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further modifications to logic 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 solve for issue 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 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 '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 for financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish between valuation 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 in 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 coworkers for commercial property. He has 20+ years of CRE experience and has underwritten over $30 billion in property throughout top institutional companies.
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