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The subject of ground leases has turned up numerous times in the previous few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the process of creating an Advanced Concepts Module for our real estate 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 utilized standalone, or included to your existing property-level model. Either way, it is helpful for both landowners aiming to size a ground lease payment or leasehold owners aiming to comprehend the value of the leasehold (i.e. improvements) relative to the cost basic interest (i.e. land).
Excel design for assessing a ground lease
What is a Ground Lease and Leasehold Interest?
If you unfamiliar with the concepts 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. In the case of a ground lease, usually one celebration owns the land (i.e. charge simple interest) while a different party owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land rents the land to the owner of the improvements for a prolonged period of time (20 - 100 years)."
Interest - "In real estate, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the charge simple owner (lessor) of the land for an extended duration of time. The lessee of a leasehold estate will usually own the enhancements 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 rent 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 prevail to prime areas, where landowners do not necessarily wish to sell however 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 office buildings in the downtown core of significant cities.
Another case where you'll encounter ground leases remain in retail shopping mall. Oftentimes, prominent retail occupants choose to construct and own their area however the designer does not necessarily want to sell the land. So, the retail tenant will accept rent the ground for 40+ years and develop their own building on the leased land. Banks, nationwide restaurants in outparcels, and large outlet store are examples of occupants that frequently agree to this structure.
Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling job.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to enable you to insert this model into your own property-level design to make it much easier to include a ground lease component 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 model, in addition to find essential links connected to the model.
The Ground Lease worksheet is broken up into seven areas as laid out and described below:
The Residential or commercial property Description section includes 5 inputs related to the investment. These inputs are:
SF/M2 - In cell I3 get in whether the procedure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It prevails in genuine estate to append the name of the 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 country.
Land Size - Total SF or M2 of land. The number of acres or hectares will than instantly be calculated in cell E6.
Leasehold Net Rentable Area - Total net rentable location in SF or M2 of the physical enhancements (i.e. the leasehold). The land is assumed 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 circumstances, you may be considering getting the arrive at which a Target Superstore is built. Target owns the structure and is leasing 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 area consists of four required 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 started. This need to 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 beginning through ground lease maturity. This is the overall length of the ground lease, not the number of years staying. The maximum 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 begin. This normally amounts to the Next Ground Lease Payment date, although the design was developed to permit for 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 analyzing a much shorter hold period, just alter the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area consists of the service regards to the ground lease, consisting of payment quantity, frequency, and rent boosts. This area includes five inputs plus the choice 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 amount may be for an annual or regular monthly payment.
Lease Increase Method - The technique utilized to model rent boosts. This can either be: None - No lease boosts.
% Inc. - A portion boost over the previous rent amount.
$ Inc. - An amount boost over the previous lease quantity.
Custom - Manually design the lease payment quantities by year. If Custom is chosen, the yearly lease payment amounts in row 26 become inputs for you to by hand alter (i.e. typeface turns blue). Important Note: If you pick Custom and start to change the annual rent payment amounts 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 determine the reversion worth of the land (i.e. ground lease), the present value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This area is separated into 3 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 to put it simply, a typical direct cap valuation of a genuine estate investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income originated from leasing 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 consisted of. The concept being to show up at 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 cost (i.e. before inflation). Retenanting may consist of simple leasing expenses, it may consist of renovation and leasing, or it might consist of taking apart the structure and restoring something brand-new. The concept is to come to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Per Year) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to reach 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 value used in the ground lease present value calculation. It is determined by taking the residential or commercial property worth web of any retenanting costs, and then growing it by a growth rate. The value is an optional input in case you wish to personalize the reversion worth.
Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Consider 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 enables you to determine 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 section where you can enter your acquisition/investment cost, and see the corresponding returns from that investment. The section includes simply one input.
Ground Lease Investment Cost - This is the cost 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 associated with the financial investment.
After getting in the Ground Lease Investment Cost, the area computes five return metrics:
- Unlevered Internal Rate of Return
這將刪除頁面 "Ground Lease Valuation Model (Updated Mar 2025)."
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