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The subject of ground leases has actually come up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of creating an Advanced Concepts Module for our property financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a good time to share my Ground Lease in Excel.

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

Excel design for examining 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 a real estate investor leases the land (i.e. ground) only. In the case of a ground lease, generally one party owns the land (i.e. fee easy interest) while a different party owns the improvements (i.e. leasehold interest). In the majority of cases, the owner of the land leases the land to the owner of the enhancements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In genuine estate, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the charge basic owner (lessor) of the land for an extended period of time. The lessee of a leasehold estate will usually own the improvements on the land and utilize the land and enhancements as if the lessee were the owner of the land. During the term of 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 should return use of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime locations, where landowners do not always want to offer but where they may not have the knowledge (or desire) to run. Thus, they rent the land to someone who owns and runs the improvements on the land, and get a ground lease payment in return. You see this quite frequently with workplace structures in the downtown core of significant cities.

Another case where you'll face ground leases are in retail shopping centers. Oftentimes, prominent retail renters prefer to construct and own their space but the developer does not necessarily wish to offer the land. So, the retail renter will consent to lease 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 occupants that typically consent to this structure.

Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling project.

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are included on one worksheet. This is intentional to allow you to place this design into your own property-level design to make it much easier to add a ground lease part to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a change log for the model, in addition to discover crucial links connected to the design.

The Ground Lease worksheet is broken up into 7 sections as described and described listed below:

The Residential or commercial property Description area consists of five inputs associated to the investment. These inputs are:
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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 add the name of the 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 computed in cell E6. Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical improvements (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 different individual or entity. So for circumstances, you might be thinking about getting the arrive at which a Target Superstore is developed. Target owns the structure and is leasing the land for some prolonged duration of time. The total rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section 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 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 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 normally 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 analyzing a much shorter hold period, just alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area consists of the business terms of the ground lease, consisting of payment amount, frequency, and rent boosts. This area consists of five inputs plus the choice to manually model the rent payment amounts.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this quantity might be for an annual or monthly payment. Lease Increase Method - The method utilized to model rent increases. This can either be: None - No rent boosts. % Inc. - A portion increase over the previous rent quantity. $ Inc. - An amount increase over the previous lease amount. Custom - Manually design the lease payment amounts by year. If Custom is chosen, the annual rent payment amounts in row 26 end up being inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you choose Custom and begin to change the yearly lease payment quantities 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) area 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 section is separated into three subsections, with five inputs and one optional input throughout 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 to put it simply, a typical direct cap appraisal of a genuine estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings originated 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 consisted of. The idea being to reach 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 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 cost (i.e. before inflation). Retenanting may include simple leasing costs, it may consist of remodelling and leasing, or it may include taking apart the structure and restoring something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after representing the cost to retenant. Reversion Growth Rate (Each Year) - All of the above calculations are done before representing 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)' utilized as the reversion worth in the ground lease present value computation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value estimation. It is calculated by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a development rate. The worth is an optional input in case you desire to customize the reversion worth.

Discount Rate - The discount rate at which to calculate the present worth of the ground lease cash circulations. Think about 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) area permits you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering buying a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the corresponding returns from that financial investment. The section consists of just one input.

Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It should consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses related to the financial investment.

After going into the Ground Lease Investment Cost, the section calculates 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 based on the analysis duration, payment schedule, and reversion worth.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) section enables you to determine the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and intend to finance the purchase, it is within this area where you can go into the financial obligation assumptions, and see the corresponding return from that levered investment. The area consists of three inputs.
  
  Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan quantity.
• Annual Rate Of Interest - 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 yearly.
  
  After getting in the financial obligation assumptions 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 based on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will likewise greatly drive the levered return. And as a pointer, in the meantime the design just permits 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 used in the various information recognition lists are found. Unless you intend to customize the design, there is no factor to change the worths in this area.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually assembled a short video that strolls you through the numerous areas of the model. Note that this video is based on v1.0 of the design.
  
  Download the Ground Lease Valuation Model
  
  To make this model available to everyone, it is provided on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or maximum (your support assists keep the material coming - normal realty assessment models sell for $100 - $300+ per license). Just get in a rate together with an e-mail address to send out 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 connect to either Mike or Spencer.
  
  We frequently upgrade the model (see version notes). Paid contributors to the design get a new download link through email 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 details in E17: G17.
• Updated I22 to reflect more precise years of term remaining.
• 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 fix for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!).
• Updates to placeholder values
  
  Version 2.1
  
  - Updates to placeholder values.
• Added extra notes under 'Quick 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 enhanced user experience.
• Added a 'Quick Start Guide' to offer a tutorial for utilizing the model.
• Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation functions.
• Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
• Added 'Investment Term' presumption to enable financier to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between appraisal 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 separate in between Valuations sections 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 colleagues for commercial property. He has 20+ years of CRE experience and has actually financed over $30 billion in property across leading institutional companies.