The subject of ground leases has actually turned up several times in the past few weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the process of producing 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 contributed to your existing property-level model. In any case, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners wanting to comprehend the value of the leasehold (i.e. improvements) relative to the charge simple interest (i.e. land).

Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unknown with the concepts of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where a genuine estate financier leases the land (i.e. ground) only. In the case of a ground lease, usually one party owns the land (i.e. fee simple interest) while a different party owns the enhancements (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 genuine estate, a leasehold interest describes a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the fee basic owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will typically own the enhancements 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 must return use of the land, and any improvements thereon, to the land owner.

Ground leases are common to prime places, where landowners do not always want to sell but where they might not have the knowledge (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 workplace structures in the downtown core of major cities.

Another case where you'll face ground leases are in retail shopping centers. Oftentimes, prominent retail occupants prefer to build and own their space however the developer does not always wish to offer the land. So, the retail occupant will concur to rent the ground for 40+ years and develop their own building on the leased land. Banks, nationwide restaurants in outparcels, and big outlet store are examples of renters that often accept this structure.

Quick Note: Not thinking about DIY analysis? Consider dealing 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 deliberate to allow you to place this model into your own property-level model to make it easier to add a ground lease component to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can see a modification log for the design, in addition to discover essential links associated with the model.

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

The Residential or commercial property Description area consists of 5 inputs associated to the financial investment. These inputs are:

SF/M2 - In cell I3 get in whether the procedure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in property to add the name of the financial investment with (Ground Lease) to signify that the investment is for the fee 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 presumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for example, you may be thinking about obtaining the land on which a Target Superstore is built. Target owns the building and is leasing the land for some extended amount of time. The total rentable area of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing section consists of 4 required 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 commenced. This need to 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 start 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 on the ground lease length, the design 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 usually amounts 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 case you're evaluating a shorter hold duration, just change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section consists of the company regards to the ground lease, consisting of payment amount, frequency, and lease increases. This area consists of five inputs plus the option to manually model the rent payment quantities.

Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see listed below), this amount might be for an annual or regular monthly payment.
Lease Increase Method - The method utilized to model rent increases. This can either be: None - No rent increases.
% Inc. - A portion increase over the previous lease quantity.
$ Inc. - A quantity boost over the previous lease amount.
Custom - Manually design the rent payment amounts by year. If Custom is picked, the yearly rent payment quantities in row 26 end up being inputs for you to manually change (i.e. typeface turns blue). Important Note: If you select Custom and start to change the annual 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 compute the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is broken up into three subsections, with five 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 in other words, a typical direct cap appraisal of a realty investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from leasing the enhancements, unique 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 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 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 consist of easy leasing expenses, it might include restoration and leasing, or it might consist of tearing down the building and reconstructing something brand-new. The concept is to reach a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Per Year) - All of the above estimations are done before accounting for inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' used 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 worth calculation. It is calculated by taking the residential or commercial property value internet of any retenanting costs, and after that growing it by a growth rate. The worth is an optional input in the event you want to customize the reversion value.

Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Think of this discount rate as an obstacle 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 acquiring 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 consists of simply one input.

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

After entering the Ground Lease Investment Cost, the area determines 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 highly depending on the analysis duration, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section permits you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering purchasing a ground lease and plan to fund the purchase, it is within this section where you can get in the debt assumptions, and see the matching return from that levered financial investment. The section consists of three inputs.

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will compute the loan quantity.
- Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design 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 going into the financial obligation presumptions for the ground lease investment, the section calculates 5 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 value. The amount and rate of the financial obligation will also 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 final area is where backend inputs used in the various information recognition lists are discovered. 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 assistance above, I've put together a short video that strolls you through the numerous areas of the design. Note that this video is based upon v1.0 of the model.

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 (get in $0 if you 'd like) or maximum (your assistance assists keep the content coming - normal property evaluation models sell for $100 - $300+ per license). Just go into a price together with an email 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 use our models on this basis, please reach out to either Mike or Spencer.

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

Version Notes

Version 2.33

- Rewrote 'Quick Start Guide' with updates and for improved 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 revisions to logic in I59

Version 2.3

- Fixed concern 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 fix for concern 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 worths.
- Added extra notes under 'Quick Start Guide' to clarify typical confusion around start dates for various areas.
- 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 'Quick Start Guide' to offer a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information functions.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable 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 formatting to much better distinguish between Valuations sections and Investment Returns areas.
- Adjusted return solutions 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 commercial genuine estate. He has 20+ years of CRE experience and has actually financed over $30 billion in realty across top institutional firms.