The topic of ground leases has actually come up numerous times in the previous couple of 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 producing an Advanced Concepts Module for our property monetary modeling covering the mechanics of modeling ground leases. So I believed now would be an excellent time to share my Ground Lease Valuation Model in Excel.
This design can be used standalone, or added to your existing property-level model. In any case, it is valuable for both landowners aiming to size a ground lease payment or leasehold owners seeking to understand the value of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).
Excel model for examining a ground lease
What is a Ground Lease and Leasehold Interest?
If you unknown 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 an investor rents the land (i.e. ground) only. In the case of a ground lease, typically one party owns the land (i.e. cost basic interest) while a separate party owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the enhancements for an extended amount of time (20 - 100 years)."
Leasehold Interest - "In property, a leasehold interest refers to a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the charge simple owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will generally own the improvements on the land and use 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 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.
Ground leases prevail to prime locations, where landowners do not necessarily desire to offer but where they may not have the proficiency (or desire) to run. Thus, they rent the land to someone who owns and operates the improvements on the land, and get a ground lease payment in return. You see this frequently with office buildings in the downtown core of significant cities.
Another case where you'll face ground leases are in retail shopping centers. Oftentimes, popular retail occupants prefer to develop and own their area however the designer does not always wish to sell the land. So, the retail tenant will agree to lease the ground for 40+ years and build their own structure on the leased land. Banks, national dining establishments in outparcels, and big department shops are examples of renters that often concur to this structure.
Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to handle 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 allow you to place this model into your own property-level design to make it 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 likewise consisted of where you can view a change log for the model, along with find essential links related to the design.
The Ground Lease worksheet is separated into 7 areas as outlined and explained listed below:
The Residential or commercial property Description section includes 5 inputs related to the investment. These inputs are:
SF/M2 - In cell I3 go into whether the step of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in realty to append the name of the investment with (Ground Lease) to signify that the investment is for the cost basic 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 calculated 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. enhancements) to be owned by a separate person or entity. So for example, you might be thinking about obtaining the arrive at which a Target Superstore is built. Target owns the structure and is leasing the land for some extended time period. The total 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 belong to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease began. This must also be the month and year of the 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 total 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 is equal to the Next Ground Lease Payment date, although the model was developed 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 duration, simply alter the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area includes business terms of the ground lease, consisting of payment amount, frequency, and lease increases. This section includes five inputs plus the choice to by hand model the lease payment amounts.
Initial Payment Amount - The quantity of the very first lease payment. Depending on the payment frequency input (see listed below), this quantity might be for an annual or regular monthly payment.
Lease Increase Method - The technique utilized to model lease increases. This can either be: None - No lease boosts.
% Inc. - A percentage boost over the previous rent amount.
$ Inc. - An amount increase over the previous lease quantity.
Custom - Manually model the lease payment quantities by year. If Custom is chosen, the annual lease payment amounts in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you choose Custom and start to alter the yearly lease payment quantities in row 26, there is no chance 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 worth 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 section is separated into three subsections, with 5 inputs and one optional input throughout the three subsections.
Ground Lease Reversion Value - Within this subsection you design 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 realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained from renting the improvements, special 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 get to a worth 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 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 include simple leasing expenses, it might consist of renovation and leasing, or it might include tearing down the building and restoring something brand-new. The concept is to get here at a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Per Year) - All of the above estimations 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)' utilized as the reversion worth in the ground lease present value estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present value calculation. It is calculated by taking the residential or commercial property worth net of any retenanting expenses, and after that growing it by a growth rate. The value is an optional input in the event you want to customize the reversion value.
Discount Rate - The discount rate at which to compute the present value of the ground lease money circulations. Think of this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease financial investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) area allows you to determine the unlevered (i.e. before financial obligation) returns of a ground lease investment. If you are considering 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 simply one input.
Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It needs to include the acquisition expense, together with any other due diligence, closing, and pursuit expenses associated with the investment.
After getting in the Ground Lease Investment Cost, the section 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 reliant on the analysis period, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area permits you to determine the levered (i.e. with debt) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to fund the purchase, it is within this section where you can go into the financial obligation presumptions, and see the corresponding return from that levered financial investment. The section 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 Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently 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 financial obligation assumptions for the ground lease investment, the area determines 5 return metrics:
- - Levered Internal Rate of Return - Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return
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Similar to the unlevered analysis, the resulting returns are highly reliant on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will also greatly drive the levered return. And as a tip, for now the design just permits 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 section is where backend inputs used in the different information recognition lists are found. Unless you plan to modify the design, there is no reason to change the values 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 walks you through the various sections of the design. Note that this video is based upon v1.0 of the model.
Download the Ground Lease Valuation Model
To make this design accessible to everyone, it is offered on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or optimum (your assistance assists keep the content coming - typical property appraisal models offer for $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.
We routinely upgrade the design (see version notes). Paid contributors to the model receive a new download link via e-mail each time the model is updated.
Version Notes
Version 2.33
- Rewrote 'Flying Start Guide' with updates and for enhanced readability - Updates to placeholder worths
- Fix to misspelled word on Version tab
Version 2.32
- Removed redundant details 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 out on 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 fix!). - Updates to placeholder values
Version 2.1
- Updates to placeholder worths. - Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for different 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 provide a tutorial for using the design.
- 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 permit investor 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 financial 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 separate in between Valuations areas and Investment Returns areas.
- Adjusted return solutions 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 business property. He has 20+ years of CRE experience and has financed over $30 billion in property across top institutional companies.
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