1 Ground Lease Valuation Model (Updated Mar 2025).

Virgilio Boothe edited this page 2 months ago

The topic of ground leases has actually come up numerous times in the past few 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 creating an Advanced Concepts Module for our realty financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great 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 helpful for both landowners wanting to size a ground lease payment or leasehold owners looking to understand the worth of the leasehold (i.e. improvements) relative to the charge easy interest (i.e. land).

Excel design for examining 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:

- "A lease structure where a real estate investor rents the land (i.e. ground) just. In the case of a ground lease, generally one party owns the land (i.e. cost easy 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 an extended duration of time (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest describes a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the charge basic owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will typically 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 lease to the lessor for use of the land. At the end of the ground lease term, the lessee needs to return usage of the land, and any improvements thereon, to the land owner.

Ground leases are typical to prime locations, where landowners do not necessarily desire to sell but where they might not have the expertise (or desire) to run. Thus, they lease the land to somebody who owns and runs the improvements on the land, and get a ground lease payment in return. You see this on a regular basis with workplace structures in the downtown core of significant cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, popular retail tenants choose to build and own their space but the developer does not necessarily wish to offer the land. So, the retail tenant will consent to rent the ground for 40+ years and construct their own structure 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 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 sections of the Ground Lease Valuation Model are contained on one worksheet. This is intentional to permit you to insert this design into your own property-level design to make it much easier to include 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 see a modification log for the design, in addition to find important links associated with the design.

The Ground Lease worksheet is broken up into 7 areas as detailed and discussed below:

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

SF/M2 - In cell I3 get in whether the procedure of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the financial investment. It prevails in realty to add the name of the financial investment with (Ground Lease) to represent that the financial investment is for the cost basic 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 variety 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 assumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for example, you may be considering getting the arrive at which a Target Superstore is built. Target owns the building and is leasing the land for some extended time period. The overall 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 investment.

Ground Lease Start Date - The month and year when the ground lease started. This ought 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 number of years staying. The optimum length is 100 years. Based upon 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 normally amounts to the Next Ground Lease Payment date, although the design was built to enable 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, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section includes business regards to the ground lease, consisting of payment quantity, frequency, and lease boosts. This section consists of five inputs plus the alternative to by hand model the rent payment amounts.

Initial Payment Amount - The amount of the very first lease payment. Depending upon the payment frequency input (see listed below), this quantity may be for an annual or month-to-month payment. Lease Increase Method - The method used to design lease boosts. This can either be: None - No lease increases. % Inc. - A portion increase over the previous rent quantity. $ Inc. - An amount increase over the previous rent amount. Custom - Manually design the lease 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. font turns blue). Important Note: If you pick Custom and start to change the annual 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) section 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 value of the leasehold interest. This section is separated into 3 subsections, with five inputs and one optional input across the three subsections.

Ground Lease Reversion Value - Within this subsection you design the worth of the residential or commercial property as if there was no ground lease. Or in other words, a normal direct cap appraisal of a genuine estate financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated 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 included. The concept being to come 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 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 might consist of simple leasing expenses, it might include restoration and leasing, or it may consist of tearing down the building and rebuilding something new. The concept is to get to a 'Net Reversion Value (Nominal)' after representing the expense to retenant. Reversion Growth Rate (Each Year) - All of the above estimations are done before representing inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to get here at a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth computation. It is determined by taking the residential or commercial property value web of any retenanting costs, and then growing it by a growth rate. The value is an optional input in case you wish to customize the reversion value.

Discount Rate - The discount rate at which to compute today value of the ground lease money circulations. 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) area allows you to compute the unlevered (i.e. before financial obligation) returns of a ground lease financial 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 matching returns from that investment. The section consists of just one input.

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

After going into the Ground Lease Investment Cost, the area 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 dependent on the analysis duration, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area allows you to determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about buying a ground lease and mean to finance 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 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 determine the loan quantity.
• Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the design currently just enables for an interest-only loan.
• Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or annually.
  
  After going into the debt presumptions 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
  
  Just like the unlevered analysis, the resulting returns are extremely depending on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will also heavily drive the levered return. And as a tip, in the meantime the model only enables debt 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 numerous data validation lists are found. Unless you plan to customize the design, there is no factor to alter 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've put together a brief video that strolls you through the different areas 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 used on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or maximum (your assistance helps keep the content coming - common real estate evaluation models cost $100 - $300+ per license). Just go into a rate together with an e-mail address to send 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 designs on this basis, please reach out to either Mike or Spencer.
  
  We routinely upgrade the design (see version notes). Paid contributors to the design get a new download link via email each time the design is updated.
  
  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 details in E17: G17.
• Updated I22 to show more precise years of term remaining.
• Updates to placeholder worths
  
  Version 2.31
  
  - Further revisions to logic in I59
  
  Version 2.3
  
  - Fixed problem where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing the last cell
  
  Version 2.2
  armerelectrical.com
  - Revised formula in M26: DG26 to resolve for issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
• Updates to placeholder worths
  
  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 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 clarification purposes.
• 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 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 much better differentiate in between Valuations areas and Investment Returns areas.
• Adjusted return formulas 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 colleagues for commercial real estate. He has 20+ years of CRE experience and has financed over $30 billion in realty across leading institutional firms.