The topic of ground leases has come up several 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 of developing an Advanced Concepts Module for our realty 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 added to your existing property-level design. In any case, it is useful for both landowners looking to size a ground lease payment or leasehold owners wanting to understand the worth of the leasehold (i.e. improvements) relative to the cost basic interest (i.e. land).
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Excel design for evaluating 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 meanings in our Glossary of CRE Terms:
Ground lease - "A lease structure where an investor rents the land (i.e. ground) just. When it comes to a ground lease, usually one party owns the land (i.e. charge easy 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 improvements for an extended period of time (20 - 100 years)."
Leasehold 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 fee basic owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will typically own the improvements on the land and utilize 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 should return use of the land, and any improvements thereon, to the land owner.
Ground leases prevail to prime places, where landowners do not always desire to sell but where they might not have the competence (or desire) to operate. 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 office structures in the downtown core of significant cities.
Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, prominent retail occupants choose to build and own their area but the developer does not always want to offer the land. So, the retail occupant will accept rent the ground for 40+ years and construct their own structure on the rented land. Banks, nationwide dining establishments in outparcels, and big outlet store are examples of renters that typically consent to this structure.
Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling task.
How to Use the Ground Lease Valuation Model
All sections of the Ground Lease Valuation Model are included on one worksheet. This is intentional to allow you to place this model 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 consisted of where you can view a change log for the design, in addition to find crucial links connected to the design.
The Ground Lease worksheet is broken up into seven areas as described and discussed below:
The Residential or commercial property Description area consists of five inputs associated to the financial investment. These inputs are:
SF/M2 - In cell I3 enter 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 prevails in genuine estate to append the name of the financial investment with (Ground Lease) to signify that the financial investment is for the fee 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 variety of acres or hectares will than automatically be computed in cell E6.
Leasehold Net Rentable Area - Total net rentable area 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 separate individual or entity. So for example, you might be considering getting the arrive on which a Target Superstore is developed. Target owns the structure and is leasing the land for some prolonged amount of time. The overall rentable location of the building 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 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 remaining. The optimum length is 100 years. Based upon the ground lease length, the model 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 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 case you're analyzing a shorter hold duration, simply change the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area consists of business regards to the ground lease, including payment amount, frequency, and rent increases. This area consists of five inputs plus the choice to manually design the lease payment quantities.
Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see below), this amount may be for an annual or month-to-month payment.
Lease Increase Method - The method used to model rent boosts. This can either be: None - No rent boosts.
% Inc. - A portion increase over the previous lease amount.
$ Inc. - An amount increase over the previous rent quantity.
Custom - Manually model the lease payment quantities by year. If Custom is chosen, the yearly lease payment amounts 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 change the yearly lease payment amounts in row 26, there is no method 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 broken up into 3 subsections, with 5 inputs and one optional input throughout the three subsections.
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 to put it simply, a common direct cap assessment of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings originated from renting 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 consisted of. The concept being to reach 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 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 basic leasing costs, it might include restoration and leasing, or it might consist of taking apart the building and restoring something new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant.
Reversion Growth Rate (Annually) - All of the above estimations are done before accounting for inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present worth calculation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value calculation. It is calculated by taking the residential or commercial property value web of any retenanting expenses, and then growing it by a development rate. The worth is an optional input in case you desire to personalize the reversion worth.
Discount Rate - The discount rate at which to determine the present value of the ground lease cash circulations. Consider this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) section permits you to compute the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about purchasing 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 section includes simply one input.
Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It must consist of the acquisition cost, together with any other due diligence, closing, and pursuit costs associated with the financial investment.
After entering the Ground Lease Investment Cost, the section computes 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 highly depending on the analysis duration, payment schedule, and reversion worth.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area permits you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease and plan to fund the purchase, it is within this area where you can go into the financial obligation presumptions, and see the corresponding return from that levered financial 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 amount. - Annual Interest Rate - 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 month-to-month or each year.
After getting in the financial obligation assumptions for the ground lease investment, the area determines 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 highly depending on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will also heavily drive the levered return. And as a pointer, for now the design just enables financial obligation 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 utilized in the various data recognition lists are found. Unless you intend to customize the model, there is no reason to change the worths 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 put together a short video that walks you through the different sections of the design. Note that this video is based on v1.0 of the design.
Download the Ground Lease Valuation Model
To make this model available to everybody, it is used on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your support helps keep the material coming - normal realty evaluation models cost $100 - $300+ per license). Just enter a price 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 provide our models on this basis, please reach out to either Mike or Spencer.
We frequently upgrade the model (see variation notes). Paid factors to the design receive a new download link by means of email each time the design is upgraded.
Version Notes
Version 2.33
- Rewrote 'Quick 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 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 out on 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 fix!). - Updates to placeholder values
Version 2.1
- Updates to placeholder worths. - Added extra notes under 'Flying start Guide' to clarify common 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 improved user experience. - Added a 'Flying Start Guide' to supply a tutorial for using the design.
- 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' assumption to permit for financier to evaluate returns on an Analysis Period 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 formatting to much better distinguish in between Valuations sections and Investment Returns sections.
- Adjusted return formulas to make dynamic 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 property. He has 20+ years of CRE experience and has actually financed over $30 billion in realty across top institutional companies.
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