The subject of ground leases has actually shown up a number of 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 remain in the procedure of developing an Advanced Concepts Module for our property monetary 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.
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This design can be used standalone, or contributed to your existing property-level design. In any case, it is useful for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. improvements) relative to the charge simple interest (i.e. land).
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Excel model for evaluating a ground lease
What is a Ground Lease and Leasehold Interest?
If you unknown with the ideas 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) just. In the case of a ground lease, typically one celebration owns the land (i.e. fee simple interest) while a different party owns the enhancements (i.e. leasehold interest). In a lot of cases, the owner of the land leases the land to the owner of the enhancements for an extended period of time (20 - 100 years)."
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 charge easy owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will usually own the improvements on the land and utilize 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 usage of the land. At the end of the ground lease term, the lessee must return use of the land, and any enhancements thereon, to the land owner.
Ground leases prevail to prime locations, where landowners don't always want to sell but where they might not have the knowledge (or desire) to operate. Thus, they rent the land to somebody who owns and runs the enhancements 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 renters choose to develop and own their space but the developer does not necessarily wish to sell the land. So, the retail tenant will agree to rent the ground for 40+ years and construct their own building on the leased land. Banks, national restaurants in outparcels, and large 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 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 allow you to place this model into your own property-level design 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 connected to the design.
The Ground Lease worksheet is broken up into seven sections as outlined and described listed below:
The Residential or commercial property Description area includes five inputs associated to the financial investment. These inputs are:
SF/M2 - In cell I3 enter whether the step of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It is typical in property to append the name of the financial investment with (Ground Lease) to represent that the financial investment is for the cost easy 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 number of acres or hectares will than automatically be determined 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 person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate individual or entity. So for example, you might be thinking about acquiring the land on which a Target Superstore is built. Target owns the building and is renting the land for some prolonged amount of time. The total rentable location of the structure is the 'Leasehold Net Rentable Area'.
Section 1 - Residential Or Commercial Property Description
The Investment Timing section consists of four needed inputs and one optional inputs. These inputs relate 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 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 number of years remaining. The maximum length is 100 years. Based on 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 begin. This generally is equal to the Next Ground Lease Payment date, although the design 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 the occasion 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 section includes business regards to the ground lease, including payment quantity, frequency, and lease boosts. This section includes five inputs plus the choice to by hand design the rent payment amounts.
Initial Payment Amount - The quantity of the 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 approach utilized to model lease increases. This can either be: None - No lease increases.
% Inc. - A percentage increase over the previous lease quantity.
$ 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 manually change (i.e. font turns blue). Important Note: If you select Custom and begin to alter the yearly lease payment amounts in row 26, there is no way to revert back to another Lease Increase Method.
Section 3 - Ground Lease Terms
It is within the Valuation (Fee and Leasehold) area where you calculate the reversion value of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is broken up into three subsections, with 5 inputs and one optional input across the 3 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 common direct cap evaluation of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income derived from leasing the improvements, exclusive 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 idea being to get to a value 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 consist of simple leasing costs, it might consist of restoration and leasing, or it may consist of taking down the building and restoring something new. The concept is to come to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Annually) - All of the above computations are done before accounting for inflation (i.e. development). 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 value utilized in the ground lease present value calculation. It is determined by taking the residential or commercial property value net of any retenanting expenses, and then growing it by a growth rate. The worth is an optional input in the event you want to customize the reversion worth.
Discount Rate - The discount rate at which to calculate the present worth of the ground lease cash flows. Think of this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease 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 acquiring a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that financial investment. The section includes just one input.
Ground Lease Investment Cost - This is the expense to get land with a ground lease. It ought to consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the financial 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 extremely reliant on the analysis period, payment schedule, and reversion worth.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area permits you to determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about purchasing a ground lease and intend to finance the purchase, it is within this area where you can go into the financial obligation presumptions, and see the matching return from that levered financial investment. The area includes 3 inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan quantity. - Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design presently just permits for an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
After getting in the debt assumptions 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 highly dependent on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will also greatly drive the levered return. And as a suggestion, for now the model only allows for debt with interest-only payments and a balloon at the end of the analysis period.
Section 6 - Ground Lease Returns (Levered)
The last area is where backend inputs utilized in the numerous information recognition lists are found. Unless you intend 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 assistance above, I have actually created a short video that walks you through the numerous sections 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 everyone, it is used on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your support assists keep the content coming - normal property evaluation models offer for $100 - $300+ per license). Just go into a price together with an email 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 use our models on this basis, please reach out to either Mike or Spencer.
We frequently update the design (see variation notes). Paid factors to the model get a new download link via e-mail each time the model 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 reflect more accurate years of term staying.
- Updates to placeholder worths
Version 2.31
- Further modifications to reasoning 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 fix 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 values. - Added additional notes under 'Flying 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 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 information purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' assumption to allow for investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in 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 differentiate 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 coworkers for industrial real estate. He has 20+ years of CRE experience and has underwritten over $30 billion in realty throughout top institutional companies.