1 Ground Lease Valuation Model (Updated Mar 2025).

Arleen Ernest edited this page 2 weeks ago

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The topic of ground leases has actually turned up several times in the previous few weeks. Numerous A.CRE readers have 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 financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a good time to share my Ground Lease Valuation Model in Excel.

This model can be utilized standalone, or contributed to your existing property-level design. In either case, it is useful for both landowners wanting to size a ground lease payment or leasehold owners seeking to comprehend the worth of the leasehold (i.e. enhancements) relative to the cost 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 ideas of Ground Lease and Leasehold Interest, you to the definitions in our Glossary of CRE Terms:

Ground lease - "A lease structure where an investor rents the land (i.e. ground) only. When it comes to a ground lease, typically one celebration owns the land (i.e. charge basic interest) while a different party owns the improvements (i.e. leasehold interest). In a lot of cases, the owner of the land leases the land to the owner of the enhancements for a prolonged amount of time (20 - 100 years)."

Leasehold Interest - "In realty, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the fee easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will generally own the enhancements on the land and use the land and improvements as if the lessee were the owner of the land. During the regard to 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 needs to return usage 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 but where they might not have the proficiency (or desire) to run. Thus, they rent the land to someone who owns and runs the improvements on the land, and get 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 run into ground leases are in retail shopping mall. Oftentimes, prominent retail renters prefer to build and own their space however the developer doesn't always wish to sell the land. So, the retail tenant will accept lease the ground for 40+ years and develop their own structure on the leased land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of tenants that often concur 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 areas of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to enable you to insert this design into your own property-level design to make it easier to include a ground lease element to your analysis.

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

The Ground Lease worksheet is separated into seven sections as laid out and discussed below:

The Residential or commercial property Description section includes five inputs associated to the investment. These inputs are:

SF/M2 - In cell I3 get in whether the step of size is in square feet (SF) or square meters (M2). Residential or commercial property Name - Name of the investment. It prevails in property to append the name of the investment with (Ground Lease) to denote that the financial 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 number of acres or hectares will than instantly 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 different individual or entity. So for example, you may be thinking about acquiring the land on which a Target Superstore is developed. Target owns the structure and is renting the land for some extended period of time. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of four needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease commenced. This should also 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 commencement 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 upon the ground lease length, the model 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 is equal to the Next Ground Lease Payment date, although the design was constructed 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 analyzing 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 contains business terms of the ground lease, including payment quantity, frequency, and rent boosts. This area consists of five inputs plus the option to manually model the rent payment amounts.

Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this quantity might be for an annual or regular monthly payment. Lease Increase Method - The method used to design lease boosts. This can either be: None - No lease increases. % Inc. - A percentage increase over the previous rent amount. $ Inc. - An amount boost over the previous lease quantity. Custom - Manually model the rent payment quantities by year. If Custom is chosen, the annual lease payment amounts in row 26 become inputs for you to manually change (i.e. font 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 value of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is separated into 3 subsections, with 5 inputs and one optional input throughout 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 simply put, a typical direct cap valuation of a genuine estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed 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 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 cost (i.e. before inflation). Retenanting might include easy leasing expenses, it might consist of renovation and leasing, or it may include taking apart the building and restoring something brand-new. The concept is to get 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 growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion worth in the ground lease present value estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value computation. It is computed by taking the residential or commercial property worth net of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you wish to personalize the reversion value.

Discount Rate - The discount rate at which to compute the present value of the ground lease capital. Think of this discount rate as a difficulty rate (i.e. necessary 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 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 expense, and see the corresponding returns from that financial investment. The section includes just one input.

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

After getting in the Ground Lease Investment Cost, the area computes 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 depending on the analysis period, payment schedule, and reversion value.
  
  Section 5 - Ground Lease Returns (Unlevered)
  
  The Ground Lease Returns (Levered) area permits you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering purchasing a ground lease and plan to finance the purchase, it is within this area where you can enter the financial obligation assumptions, and see the matching return from that levered 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 calculate the loan quantity.
• Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently only allows 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 assumptions 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
  
  Just like the unlevered analysis, the resulting returns are highly based on the analysis period, payment schedule, and reversion worth. The quantity and rate of the debt will also greatly drive the levered return. And as a pointer, for now the model just 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 recognition lists are found. Unless you mean to customize the design, there is no reason to change the values in this section.
  
  Section 7 - Data Validation
  
  Video Walkthrough - Using the Ground Lease Valuation Model
  
  In addition to the written guidance above, I have actually assembled a short video that strolls you through the different areas of the model. Note that this video is based on v1.0 of the model.
  
  Download the Ground Lease Valuation Model
  
  To make this model available to everyone, it is offered on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your support assists keep the content coming - common realty assessment models cost $100 - $300+ per license). Just enter 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 offer our models on this basis, please reach out to either Mike or Spencer.
  
  We regularly upgrade the design (see version notes). Paid factors to the model receive a brand-new download link by means of e-mail each time the model is updated.
  
  Version Notes
  
  Version 2.33
  
  - Rewrote 'Flying 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 accurate 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 out on the last cell
  
  Version 2.2
  
  - Revised formula in M26: DG26 to solve for issue 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 worths.
• Added additional notes under 'Quick Start Guide' to clarify typical confusion around start dates for different 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 supply a tutorial for utilizing the design.
• 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 permit investor to examine returns on an Analysis Period much 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 formatting to much better differentiate between Valuations sections and Investment Returns sections.
• Adjusted return formulas 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 genuine estate. He has 20+ years of CRE experience and has actually financed over $30 billion in genuine estate throughout top institutional firms.