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The subject of ground leases has come up a number of times in the past few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the process of developing an Advanced Concepts Module for our realty monetary modeling Accelerator program [covering](https://aikyathadevelopers.com) the mechanics of modeling ground leases. So I thought now would be a great time to share my Ground Lease [Valuation](https://www.indombivili.com) Model in Excel.
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This model can be utilized standalone, or contributed to your [existing property-level](https://athworldproperties.com) model. In any case, it is practical for both [landowners seeking](https://arkagroup.pro) to size a [ground lease](https://mudate.com.co) payment or [leasehold owners](https://lc-realestatemz.com) wanting to comprehend the value of the leasehold (i.e. improvements) [relative](https://www.goldengateapartment.com) to the fee basic interest (i.e. land).
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Excel design for examining a ground lease
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What is a Ground Lease and Leasehold Interest?
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If you not familiar with the ideas of Ground Lease and [Leasehold](https://bestpropertys.in) Interest, [I'll refer](https://chaar-realestate.com) you to the [definitions](https://ftp.alkojak.com) in our [Glossary](https://www.vibhaconsultancy.com) of CRE Terms:
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Ground lease - "A lease structure where an investor leases the land (i.e. ground) only. In the case of a ground lease, usually one celebration owns the land (i.e. fee basic interest) while a different party owns the improvements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for an extended amount of time (20 - 100 years)."
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Interest - "In genuine estate, a leasehold interest describes 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 a prolonged duration of time. The lessee of a leasehold estate will usually own the improvements on the land and utilize 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 use of the land. At the end of the ground lease term, the lessee must return usage of the land, and any enhancements thereon, to the land owner.
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Ground leases prevail to prime locations, where landowners don't always wish to sell however where they may not have the competence (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 office complex in the downtown core of major cities.
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Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, popular retail occupants choose to develop and own their space but the developer doesn't necessarily want to offer the land. So, the retail occupant will accept rent the ground for 40+ years and develop their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big department stores are examples of occupants that typically consent to this structure.
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Quick Note: Not thinking about 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 intentional to permit you to place this model into your own property-level design to make it much easier to include a ground lease component to your analysis.
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All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a change log for the model, along with find essential links associated with the design.
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The Ground Lease worksheet is separated into seven sections as detailed and explained below:
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The Residential or commercial property Description section consists of five inputs associated to the financial 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 real estate to add the name of the financial investment with (Ground Lease) to denote that the investment is for the cost easy 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 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 enhancements (i.e. the leasehold). The land is assumed to be owned by one person 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 acquiring the land on which a Target Superstore is constructed. Target owns the building and is leasing the land for some prolonged amount of time. The total rentable area of the structure is the 'Leasehold Net Rentable Area'.
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Section 1 - Residential Or Commercial Property Description
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The Investment Timing section includes four required inputs and one optional inputs. These inputs are related 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 began. This need to 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 commencement 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 begin. This usually amounts to the Next Ground Lease Payment date, although the model was developed 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 case you're examining a much shorter hold duration, merely change 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 organization regards to the ground lease, consisting of payment amount, frequency, and rent increases. This section consists of five inputs plus the choice to manually design the rent payment quantities.
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Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this amount might be for a yearly or regular monthly payment. +Lease Increase Method - The technique utilized to design rent increases. This can either be: None - No rent increases. +% Inc. - A portion boost over the previous lease amount. +$ Inc. - A quantity increase over the previous lease amount. +Custom - Manually design the lease payment quantities by year. If Custom is selected, the annual lease payment quantities in row 26 become inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you choose Custom and start to alter the annual 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 calculate the reversion value of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is broken up into three subsections, with five inputs and one optional input across the 3 subsections.
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Ground Lease Reversion Value - Within this subsection you model 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 property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income stemmed 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 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 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 cost (i.e. before inflation). Retenanting might consist of easy leasing costs, it may include restoration and leasing, or it may include taking down the building and restoring something brand-new. The concept is to get to a 'Net Reversion Value (Nominal)' after representing the expense to retenant. +Reversion Growth Rate (Each Year) - All of the above computations are done before representing inflation (i.e. development). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' used as the reversion worth 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 computed by taking the residential or commercial property value net of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you wish to personalize the reversion worth.
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Discount Rate - The discount rate at which to compute the present worth of the ground lease money flows. Consider this discount rate as a difficulty rate (i.e. required 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 permits you to calculate the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are thinking about buying a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the corresponding returns from that investment. The section includes just one input.
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Ground Lease Investment Cost - This is the cost to acquire 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 investment.
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After getting in the Ground Lease Investment Cost, the section computes 5 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 depending on the analysis period, payment schedule, and reversion worth.
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Section 5 - Ground Lease Returns (Unlevered)
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The Ground Lease Returns (Levered) section enables you to calculate the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease and plan to finance the purchase, it is within this area where you can enter the financial obligation assumptions, and see the matching 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 model will calculate the loan quantity. +- Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the model currently just enables for an interest-only loan. +- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.
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After going into the debt assumptions for the ground lease financial investment, the section computes five 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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As with the unlevered analysis, the resulting returns are highly based on the analysis duration, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a suggestion, in the meantime the design just enables for financial obligation 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 section is where backend inputs utilized in the different data validation lists are discovered. Unless you plan to customize the design, there is no factor to alter the values 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 written guidance above, I've put together a short video that strolls you through the various areas of the model. Note that this video is based upon v1.0 of the design.
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Download the Ground Lease Valuation Model
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To make this design available to everybody, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or maximum (your assistance helps keep the material coming - typical real estate evaluation designs cost $100 - $300+ per license). Just go into a rate together with an email address to send the download link to, and then 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 connect to either Mike or Spencer.
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We routinely update the model (see variation notes). Paid factors to the design receive a brand-new download link by means of email each time the design is upgraded.
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Version Notes
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Version 2.33
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- Rewrote 'Flying Start Guide' with updates and for enhanced 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 details in E17: G17. +- Updated I22 to reflect more accurate years of term remaining. +- Updates to placeholder worths
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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 concern where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing out on the last cell
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Version 2.2
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- Revised formula in M26: DG26 to resolve for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!). +- Updates to placeholder values
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Version 2.1
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- Updates to placeholder values. +- Added additional notes under 'Quick 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 improved user experience. +- Added a 'Quick Start Guide' to provide a tutorial for using the model. +- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification functions. +- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'. +- Added 'Investment Term' presumption to permit financier to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 format to much better differentiate between Valuations areas and Investment Returns areas. +- Adjusted return formulas to make vibrant to Investment Hold Period
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Version 1.0
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- 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 realty. He has 20+ years of CRE experience and has actually underwritten over $30 billion in genuine estate across leading institutional companies.
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