The subject of ground leases has actually turned up a number of times in the previous couple of weeks. Numerous A.CRE readers have to request for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our genuine estate financial 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 utilized standalone, or contributed to your existing property-level design. In either case, it is handy for both landowners wanting to size a ground lease payment or leasehold owners aiming to understand the value of the leasehold (i.e. enhancements) relative to the charge simple interest (i.e. land).
Excel design for evaluating a ground lease
What is a Ground Lease and Leasehold Interest?
If you not familiar with the principles of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:
Ground lease - "A lease structure where a real estate financier leases the land (i.e. ground) only. In the case of a ground lease, normally one celebration owns the land (i.e. cost easy interest) while a different party owns the improvements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the improvements for an extended amount 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 an extended period of time. The lessee of a leasehold estate will generally own the enhancements 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 lease 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 areas, where landowners don't necessarily wish to sell but where they might not have the expertise (or desire) to operate. Thus, they rent the land to someone who owns and runs the improvements on the land, and receive a ground lease payment in return. You see this quite frequently with workplace buildings in the downtown core of significant cities.
Another case where you'll face ground leases are in retail shopping mall. Oftentimes, popular retail occupants choose to develop and own their area however the designer does not necessarily want to offer the land. So, the retail tenant will accept rent the ground for 40+ years and build their own building on the leased land. Banks, nationwide dining establishments in outparcels, and big department stores are examples of occupants that often concur to this structure.
Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling project.
How to Use the Ground Lease Valuation Model
All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to permit you to insert this design into your own property-level design to make it simpler to include a ground lease component to your analysis.
All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can see a modification log for the design, as well as discover essential links associated with the model.
The Ground Lease worksheet is broken up into seven sections as outlined and discussed listed below:
The Residential or commercial property Description area consists of 5 inputs related to the financial investment. These inputs are:
SF/M2 - In cell I3 go into whether the measure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is common in genuine estate to add the name of the financial investment with (Ground Lease) to signify that the financial investment is for the cost 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 number 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. enhancements) to be owned by a separate individual or entity. So for example, you may be considering obtaining the arrive at which a Target Superstore is constructed. Target owns the structure and is renting the land for some prolonged amount of time. The total rentable location of the structure 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 relate to the chronology of the ground lease and investment.
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 beginning through ground lease maturity. This is the overall length of the ground lease, not the variety of years staying. The maximum 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 usually amounts to the Next Ground Lease Payment date, although the design was built to permit 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 evaluating a much shorter hold period, merely change the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area includes business regards to the ground lease, consisting of payment quantity, frequency, and lease boosts. This section includes five inputs plus the option to by hand design the lease payment amounts.
Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see listed below), this amount might be for an annual or month-to-month payment.
Lease Increase Method - The approach used to model rent boosts. This can either be: None - No rent boosts.
% Inc. - A portion increase over the previous rent amount.
$ Inc. - An amount increase over the previous rent quantity.
Custom - Manually model the lease payment quantities by year. If Custom is picked, the yearly lease payment amounts in row 26 end up being inputs for you to manually alter (i.e. font style turns blue). Important Note: If you pick Custom and begin to change the yearly lease payment quantities in row 26, there is no way to revert back to another Lease Increase Method.
Section 3 - Ground Lease Terms
It is within the Valuation (Fee and Leasehold) area where you compute the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is broken up into 3 subsections, with five inputs and one optional input throughout the 3 subsections.
Ground Lease Reversion Value - Within this subsection you model the worth of the residential or commercial property as if there was no ground lease. Or in other words, a typical direct cap assessment of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings originated from renting the improvements, unique 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 accounting for 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 expense (i.e. before inflation). Retenanting may consist of simple leasing expenses, it may include restoration and leasing, or it might consist of taking down the structure and rebuilding something brand-new. The idea is to get here at a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Each Year) - All of the above calculations are done before accounting for inflation (i.e. development). Enter a development 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 worth in the ground lease present worth estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth estimation. It is determined by taking the residential or commercial property worth net of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you wish to personalize the reversion value.
Discount Rate - The discount rate at which to compute today value of the ground lease capital. Think about this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease financial investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) area 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 section where you can enter your acquisition/investment expense, and see the corresponding returns from that financial investment. The section includes simply one input.
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 associated with the financial investment.
After going into the Ground Lease Investment Cost, the area calculates 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 worth.
Section 5 - Ground Lease Returns (Unlevered)
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 purchasing a ground lease and mean to fund the purchase, it is within this section where you can enter the debt presumptions, and see the corresponding return from that levered financial investment. The area includes three inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will calculate the loan quantity. - Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model presently just permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or every year.
After going into the debt presumptions for the ground lease 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
As with the unlevered analysis, the resulting returns are highly reliant on the analysis period, payment schedule, and reversion value. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a reminder, in the meantime the model only enables financial obligation with interest-only payments and a balloon at the end of the analysis period.
Section 6 - Ground Lease Returns (Levered)
The last section is where backend inputs used in the numerous data validation lists are found. Unless you plan to customize the design, there is no reason to alter the values in this section.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the composed guidance above, I have actually assembled a brief video that strolls you through the numerous areas of the model. Note that this video is based upon v1.0 of the design.
Download the Ground Lease Valuation Model
To make this design accessible to everybody, it is used on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance helps keep the content coming - normal property appraisal designs cost $100 - $300+ per license). Just go into a price together with an e-mail address to send out 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 reach out to either Mike or Spencer.
We routinely upgrade the design (see variation notes). Paid factors to the design get a brand-new download link by means of e-mail each time the model is updated.
Version Notes
Version 2.33
- Rewrote 'Quick Start Guide' with updates and for improved readability - Updates to placeholder values
- Fix to misspelled word on Version tab
Version 2.32
- Removed redundant information in E17: G17. - Updated I22 to show more precise years of term staying.
- Updates to placeholder worths
Version 2.31
- Further revisions to logic in I59
Version 2.3
- Fixed issue where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing the last cell
Version 2.2
- Revised formula in M26: DG26 to resolve 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 extra notes under 'Flying start Guide' to clarify common confusion around start dates for different areas.
- 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 'Quick Start Guide' to provide a tutorial for using 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 enable for financier to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish 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 much better distinguish in between Valuations areas and Investment Returns areas.
- Adjusted return formulas 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 industrial realty. He has 20+ years of CRE experience and has financed over $30 billion in genuine estate throughout top institutional companies.