The topic of ground leases has come up numerous times in the past few weeks. Numerous A.CRE readers have actually 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 believed 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 design. In either case, it is practical for both landowners aiming to size a ground lease payment or leasehold owners aiming to understand the worth of the leasehold (i.e. enhancements) relative to the fee basic interest (i.e. land).


Excel model for evaluating a ground lease


What is a Ground Lease and Leasehold Interest?


If you not familiar with the concepts 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. When it comes to a ground lease, normally one celebration owns the land (i.e. charge simple interest) while a separate celebration owns the improvements (i.e. leasehold interest). Most of the times, the owner of the land leases the land to the owner of the improvements for a prolonged time period (20 - 100 years)."


Leasehold Interest - "In realty, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the cost basic owner (lessor) of the land for an extended amount 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 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 must return usage of the land, and any improvements thereon, to the land owner.


Ground leases prevail to prime areas, where landowners don't always wish to sell but where they might not have the expertise (or desire) to run. Thus, they lease the land to someone who owns and runs the improvements on the land, and get a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of significant cities.


Another case where you'll encounter ground leases remain in retail shopping mall. Oftentimes, prominent retail tenants prefer to build and own their space however the developer doesn't necessarily wish to offer the land. So, the retail tenant will concur to rent the ground for 40+ years and develop their own structure on the rented land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of tenants that frequently accept 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 areas of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to permit you to place this model into your own property-level design to make it much easier to add a ground lease component to your analysis.


All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a modification log for the model, in addition to find important links related to the model.


The Ground Lease worksheet is separated into 7 areas as outlined and described below:


The Residential or commercial property Description section includes 5 inputs associated to the 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 real estate to append the name of the financial investment with (Ground Lease) to represent that the investment is for the charge 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 area 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. 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 built. Target owns the building and is leasing the land for some extended period of time. 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 needed inputs and one optional inputs. These inputs are associated 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 commencement through ground lease maturity. This is the overall length of the ground lease, not the variety of years staying. The optimum length is 100 years. Based on 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 is equivalent to the Next Ground Lease Payment date, although the model was built to enable 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 evaluating a shorter hold duration, simply alter the orange font cell I17 to the favored analysis end date.


Section 2 - Investment Timing


The Ground Lease Terms area includes business terms of the ground lease, consisting of payment quantity, frequency, and rent boosts. This area includes five inputs plus the alternative to manually design the lease payment quantities.


Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this amount might be for an annual or month-to-month payment.
Lease Increase Method - The approach utilized to model lease boosts. This can either be: None - No rent boosts.
% Inc. - A percentage boost over the previous lease amount.
$ Inc. - A quantity boost over the previous rent amount.
Custom - Manually model the rent payment quantities by year. If Custom is chosen, the annual rent payment quantities in row 26 end up being inputs for you to by hand alter (i.e. font style turns blue). Important Note: If you pick Custom and start to change the yearly rent 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) section where you calculate the reversion value of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is broken up into three subsections, with five inputs and one optional input across the 3 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 in other words, a normal direct cap valuation of a genuine estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings stemmed 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 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 enhancements 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 may include easy leasing costs, it may include renovation and leasing, or it might consist of taking apart the structure and restoring something new. The idea is to get to a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Each Year) - All of the above estimations are done before representing inflation (i.e. growth). Enter a growth 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 value computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value calculation. It is computed by taking the residential or commercial property worth web of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you want to tailor the reversion worth.


Discount Rate - The discount rate at which to determine today value of the ground lease capital. Think of this discount rate as an obstacle 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 calculate 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 cost, and see the matching returns from that financial investment. The section includes simply one input.


Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It must include the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the investment.


After going into the Ground Lease Investment Cost, the area 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 based on the analysis duration, payment schedule, and reversion value.


Section 5 - Ground Lease Returns (Unlevered)


The Ground Lease Returns (Levered) area permits 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 plan to fund the purchase, it is within this area where you can enter the financial obligation assumptions, and see the matching return from that levered financial investment. The area 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 Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently only enables for 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 assumptions for the ground lease investment, the area computes 5 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 highly based on the analysis period, payment schedule, and reversion worth. The amount and rate of the debt will also greatly drive the levered return. And as a pointer, in the meantime the design just allows for financial obligation with interest-only payments and a balloon at the end of the analysis duration.


Section 6 - Ground Lease Returns (Levered)


The final area is where backend inputs utilized in the various information recognition lists are found. Unless you mean to customize the model, there is no factor to alter the values in this area.


Section 7 - Data Validation


Video Walkthrough - Using the Ground Lease Valuation Model


In addition to the written assistance above, I have actually assembled a short video that walks you through the various 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 accessible to everyone, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance helps keep the material coming - common realty valuation 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 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.


We frequently upgrade the model (see variation notes). Paid factors to the design get a brand-new download link through e-mail each time the design is upgraded.


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 remaining.
- Updates to placeholder values


Version 2.31


- Further modifications to logic in I59


Version 2.3


- Fixed issue 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 fix for issue 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 worths.
- Added additional 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 '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' presumption to enable investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate in 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 differentiate in between Valuations sections and Investment Returns areas.
- 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 colleagues for business property. He has 20+ years of CRE experience and has actually underwritten over $30 billion in property across leading institutional firms.