The subject of ground leases has actually come up several times in the past couple of weeks. Numerous A.CRE readers have emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of producing an Advanced Concepts Module for our real estate monetary 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 used standalone, or contributed to your existing property-level model. In either case, it is practical for both landowners looking to size a ground lease payment or leasehold owners looking to understand the worth of the leasehold (i.e. enhancements) relative to the charge easy interest (i.e. land).
microformats.org
Excel design for assessing a ground lease
What is a and Leasehold Interest?
If you not familiar with the ideas 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 an investor rents the land (i.e. ground) only. When it comes to a ground lease, generally one party owns the land (i.e. fee basic interest) while a separate celebration owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for an extended time period (20 - 100 years)."
Leasehold Interest - "In realty, a leasehold interest refers to a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the cost basic owner (lessor) of the land for a prolonged duration of time. The lessee of a leasehold estate will usually own the improvements on the land and utilize the land and enhancements 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 must return usage of the land, and any improvements thereon, to the land owner.
Ground leases are common to prime areas, where landowners do not necessarily desire to offer however where they might not have the expertise (or desire) to operate. Thus, they rent the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this quite frequently with workplace buildings in the downtown core of major cities.
Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, prominent retail tenants prefer to construct and own their space however the designer does not necessarily desire to sell the land. So, the retail occupant will agree to lease the ground for 40+ years and develop their own building on the rented land. Banks, nationwide dining establishments in outparcels, and big department shops are examples of occupants that often accept this structure.
Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling job.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are included on one worksheet. This is intentional to permit 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 essential links related to the model.
The Ground Lease worksheet is separated into seven areas as outlined and discussed listed below:
The Residential or commercial property Description section consists of five inputs associated to the investment. These inputs are:
SF/M2 - In cell I3 go into whether the measure of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It prevails in property to append the name of the financial investment with (Ground Lease) to denote 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a different person or entity. So for example, you might be considering obtaining the land on which a Target Superstore is constructed. Target owns the building and is renting the land for some prolonged amount of time. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.
Section 1 - Residential Or Commercial Property Description
The Investment Timing section includes four needed inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease commenced. 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 beginning through ground lease maturity. This is the overall length of the ground lease, not the variety of years staying. The optimum length is 100 years. Based on 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 begin. This normally is equal to the Next Ground Lease Payment date, although the design was constructed 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 case you're examining a shorter hold duration, simply change the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area consists of business terms of the ground lease, consisting of payment quantity, frequency, and rent boosts. This section consists of five inputs plus the choice to manually design the rent payment amounts.
Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this quantity may be for a yearly or regular monthly payment.
Lease Increase Method - The method utilized to model lease boosts. This can either be: None - No rent boosts.
% Inc. - A percentage boost over the previous lease quantity.
$ Inc. - An amount boost over the previous lease amount.
Custom - Manually design the lease payment quantities by year. If Custom is chosen, the yearly rent payment amounts in row 26 become inputs for you to manually change (i.e. font style turns blue). Important Note: If you pick Custom and begin to change the yearly rent 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) section where you calculate the reversion worth of the land (i.e. ground lease), the present worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is separated into three subsections, with 5 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 in other words, a common direct cap assessment of a genuine estate investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated from leasing 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 consisted of. The concept being to get 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 return 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 include basic leasing costs, it might consist of renovation and leasing, or it may include tearing down the building and rebuilding something brand-new. The idea is to show up at a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Annually) - All of the above calculations are done before representing inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' used as the reversion worth in the ground lease present worth computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value computation. It is determined by taking the residential or commercial property worth internet of any retenanting costs, and then growing it by a growth rate. The worth is an optional input in case you wish to personalize the reversion worth.
Discount Rate - The discount rate at which to determine the present worth of the ground lease cash flows. Think about this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) section permits you to compute the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are considering acquiring 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 get land with a ground lease. It must include the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.
localghost.dev
After getting in 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 depending on the analysis duration, payment schedule, and reversion worth.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) area enables you to calculate the levered (i.e. with debt) returns of a ground lease investment. If you are thinking about acquiring a ground lease and intend to fund the purchase, it is within this section where you can go into the financial obligation assumptions, and see the matching return from that levered financial investment. The area includes 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 amount. - Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model 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 debt assumptions for the ground lease investment, the area calculates 5 return metrics:
- - Levered Internal Rate of Return - Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return
As with the unlevered analysis, the resulting returns are extremely depending on the analysis duration, payment schedule, and reversion worth. The amount and rate of the financial obligation will likewise greatly drive the levered return. And as a tip, 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 validation lists are discovered. Unless you intend to customize the design, there is no reason 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 have actually assembled 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 accessible to everybody, it is offered on a "Pay What You're Able" basis without any minimum (get in $0 if you 'd like) or optimum (your assistance helps keep the content coming - common realty assessment models offer for $100 - $300+ per license). Just get in a price together with an e-mail address to send out the download link to, and then click 'Continue'. If you have any questions 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 frequently update the design (see version notes). Paid contributors to the design get a new download link via email each time the design is upgraded.
Version Notes
Version 2.33
- Rewrote 'Quick Start Guide' with updates and for improved readability - Updates to placeholder values
- Fix to misspelled word on Version tab
Version 2.32
- Removed redundant details in E17: G17. - Updated I22 to reflect more precise years of term staying.
- Updates to placeholder values
Version 2.31
- Further revisions 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 resolve 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 worths. - Added extra notes under 'Quick 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 improved user experience. - Added a 'Flying Start Guide' to provide a tutorial for using the design.
- 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' presumption to enable financier to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in 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 better differentiate 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 realty. He has 20+ years of CRE experience and has actually financed over $30 billion in real estate across leading institutional firms.