The topic of ground leases has actually turned up numerous times in the past few weeks. Numerous A.CRE readers have actually emailed to request 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 great time to share my Ground Lease Valuation Model in Excel.

This design can be utilized standalone, or added to your existing property-level design. In either case, it is helpful for both landowners looking to size a ground lease payment or leasehold owners wanting to understand the value of the leasehold (i.e. improvements) relative to the fee 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 principles 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. When it comes to a ground lease, usually one celebration owns the land (i.e. charge basic interest) while a separate celebration owns the improvements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the enhancements for a prolonged amount of time (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where an individual 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 typically own the improvements on the land and use the land and improvements as if the lessee were the owner of the land. During the term of 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 use of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime locations, where landowners do not necessarily want to offer but where they might not have the competence (or desire) to run. Thus, they lease the land to someone who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this frequently with office complex in the downtown core of significant cities.

Another case where you'll encounter ground leases are in retail shopping centers. Oftentimes, prominent retail occupants choose to construct and own their space however the designer doesn't always desire to offer the land. So, the retail renter will consent to lease the ground for 40+ years and build their own structure on the leased land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of tenants that often agree 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 sections of the Ground Lease Valuation Model are included on one worksheet. This is intentional to permit you to place this model into your own property-level model to make it simpler to add a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a modification log for the design, along with discover crucial links related to the model.

The Ground Lease worksheet is broken up into seven areas as detailed and described listed below:

The Residential or commercial property Description section includes five inputs related to the financial 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 investment. It is common in property to add the name of the financial investment with (Ground Lease) to represent that the investment is for the cost simple 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 number of acres or hectares will than automatically 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for instance, you may be considering obtaining the land on which a Target Superstore is built. Target owns the building and is leasing the land for some prolonged amount of time. The overall rentable area of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes four needed 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 likewise 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 number of years remaining. The maximum length is 100 years. Based upon the ground lease length, the design then calculates the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This normally is equivalent to the Next Ground Lease Payment date, although the design was developed 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 examining a much shorter hold period, simply change the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes the organization terms of the ground lease, including payment quantity, frequency, and lease boosts. This section consists of five inputs plus the alternative to by hand design the lease payment amounts.

Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this amount might be for an annual or month-to-month payment.
Lease Increase Method - The method utilized to model lease increases. This can either be: None - No lease increases.
% Inc. - A percentage boost over the previous rent quantity.
$ Inc. - An amount boost over the previous lease quantity.
Custom - Manually design the rent payment amounts by year. If Custom is selected, the annual rent payment amounts in row 26 become inputs for you to manually change (i.e. font style turns blue). Important Note: If you choose Custom and start to alter the yearly lease payment quantities 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) area where you compute the reversion worth of the land (i.e. ground lease), today worth 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 design the value of the residential or commercial property as if there was no ground lease. Or to put it simply, a typical direct cap assessment of a real estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings originated from renting the enhancements, special 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 concept being to reach 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 improvements 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 simple leasing expenses, it might include remodelling and leasing, or it might include taking down the building and rebuilding something brand-new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present worth estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present worth estimation. It is calculated by taking the residential or commercial property value web of any retenanting costs, and then growing it by a growth rate. The worth is an optional input in case you wish to customize the reversion worth.

Discount Rate - The discount rate at which to calculate the present value of the ground lease cash circulations. Think about this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section allows you to calculate the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about 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 includes simply one input.

Ground Lease Investment Cost - This is the cost to obtain 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 going into the Ground Lease Investment Cost, the section determines 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 duration, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about acquiring a ground lease and plan to fund the purchase, it is within this area where you can get in the financial obligation assumptions, and see the corresponding return from that levered financial 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 annual rate to be paid on the mortgage. Note that the design currently only permits for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.

After entering the financial obligation presumptions 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

Similar to the unlevered analysis, the resulting returns are highly depending on the analysis period, payment schedule, and reversion worth. The amount and rate of the debt will also heavily drive the levered return. And as a suggestion, for now the design only enables for financial obligation with interest-only payments and a balloon at the end of the analysis duration.

Section 6 - Ground Lease Returns (Levered)

The last section is where backend inputs utilized in the different information recognition lists are discovered. Unless you plan 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 put together a brief video that strolls you through the various areas of the design. Note that this video is based on v1.0 of the design.

Download the Ground Lease Valuation Model

To make this design accessible to everybody, it is offered 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 - typical property appraisal designs cost $100 - $300+ per license). Just go into a cost together with an email address to send out the download link to, and after that click 'Continue'. If you have any questions 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 routinely upgrade the model (see variation notes). Paid contributors 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 enhanced readability
- Updates to placeholder values
- Fix to misspelled word on Version tab

Version 2.32

- Removed redundant information in E17: G17.
- Updated I22 to reflect more accurate years of term remaining.
- Updates to placeholder worths

Version 2.31

- Further modifications to reasoning in I59

Version 2.3

- Fixed concern 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 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 values.
- Added extra notes under 'Flying start Guide' to clarify typical 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 'Quick Start Guide' to offer a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' assumption 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 in 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 between Valuations areas and Investment Returns sections.
- 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 real estate. He has 20+ years of CRE experience and has actually financed over $30 billion in property across leading institutional firms.