The subject of ground leases has 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'm in the procedure of developing 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 good time to share my Ground Lease Valuation Model in Excel.
This design can be utilized standalone, or added to your existing property-level design. Either method, it is practical for both landowners wanting to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. enhancements) relative to the fee 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 ideas of and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:
Ground lease - "A lease structure where a real estate investor leases the land (i.e. ground) just. When it comes to a ground lease, typically one party owns the land (i.e. fee easy interest) while a different party owns the improvements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the improvements for an extended period of time (20 - 100 years)."
Leasehold Interest - "In real estate, a leasehold interest refers to a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the fee basic owner (lessor) of the land for a prolonged amount of time. 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 lease 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 enhancements thereon, to the land owner.
Ground leases are common to prime locations, where landowners do not necessarily wish to sell however where they may not have the know-how (or desire) to run. Thus, they rent the land to someone who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this quite typically with office complex in the downtown core of significant cities.
Another case where you'll face ground leases remain in retail shopping mall. Oftentimes, popular retail occupants choose to build and own their space however the developer doesn't always want to offer the land. So, the retail renter will consent to rent the ground for 40+ years and develop their own building on the leased land. Banks, nationwide dining establishments in outparcels, and big outlet store are examples of tenants that often accept this structure.
Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling project.
How to Use the Ground Lease Valuation Model
All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to allow you to insert this design into your own property-level design to make it easier to add a ground lease element 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, along with discover important links connected to the design.
The Ground Lease worksheet is separated into 7 areas as detailed and discussed listed below:
The Residential or commercial property Description section consists of five inputs associated 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 financial investment. It is common in realty to append the name of the investment with (Ground Lease) to denote that the investment is for the charge easy 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 instantly be determined in cell E6.
Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed 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 example, you might be thinking about obtaining the land on which a Target Superstore is developed. Target owns the building and is leasing the land for some extended duration 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 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 ought 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 start through ground lease maturity. This is the overall length of the ground lease, not the variety of years remaining. The maximum length is 100 years. Based on the ground lease length, the design 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 generally amounts to the Next Ground Lease Payment date, although the model 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 the event you're analyzing a much shorter hold period, just alter the orange font cell I17 to the preferred analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area contains the business regards to the ground lease, including payment amount, frequency, and lease boosts. This area consists of five inputs plus the alternative to manually design the rent payment quantities.
Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this quantity might be for a yearly or monthly payment.
Lease Increase Method - The method utilized to design lease boosts. This can either be: None - No lease boosts.
% Inc. - A portion increase over the previous rent amount.
$ Inc. - A quantity increase over the previous rent amount.
Custom - Manually model the rent payment amounts by year. If Custom is picked, the yearly rent payment amounts in row 26 become inputs for you to by hand change (i.e. typeface turns blue). Important Note: If you select Custom and begin to change the yearly rent 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 value 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 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 to put it simply, a typical direct cap appraisal of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income 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 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 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 expense (i.e. before inflation). Retenanting might include simple leasing expenses, it might include renovation and leasing, or it might include taking down the building and reconstructing something 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 development rate here, and the 'Net Reversion Value (Nominal)' will be grown to show up at 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 value used in the ground lease present value computation. It is computed by taking the residential or commercial property value internet of any retenanting expenses, and then growing it by a development rate. The worth is an optional input in case you wish to tailor the reversion worth.
Discount Rate - The discount rate at which to determine the present worth of the ground lease money flows. Think of this discount rate as a hurdle 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 enables you to compute the unlevered (i.e. before financial obligation) 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 cost, and see the corresponding returns from that investment. The area includes simply one input.
Ground Lease Investment Cost - This is the cost to obtain land with a ground lease. It must consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the investment.
After entering the Ground Lease Investment Cost, the area 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 depending 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 investment. If you are considering buying a ground lease and mean to fund the purchase, it is within this area where you can enter the debt 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 determine the loan amount. - Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the design presently only permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
After going into the financial obligation assumptions for the ground lease investment, the section calculates five 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 dependent on the analysis period, payment schedule, and reversion value. The quantity and rate of the debt will also heavily drive the levered return. And as a suggestion, in the meantime the design only allows for 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 different information validation lists are found. Unless you plan to modify the design, there is no reason to alter the worths in this section.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the composed guidance above, I've put together a brief video that walks you through the different sections 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 available 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 content coming - common real estate appraisal designs cost $100 - $300+ per license). Just get in a price 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 reach out to either Mike or Spencer.
We routinely upgrade the design (see variation notes). Paid contributors to the model get a new download link via e-mail each time the model is upgraded.
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 information in E17: G17. - Updated I22 to show more precise years of term staying.
- Updates to placeholder worths
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 solve for concern 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 values. - Added additional 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 improved user experience. - Added a 'Quick Start Guide' to supply 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' assumption to enable for financier to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between appraisal and 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 distinguish between Valuations sections and Investment Returns areas.
- Adjusted return solutions to make vibrant to Investment Hold Period
Version 1.0
thefreedictionary.com
- 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 underwritten over $30 billion in real estate throughout leading institutional firms.
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