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Add Ground Lease Valuation Model (Updated Mar 2025).

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<br>The topic of [ground leases](https://akarat.ly) has shown up several times in the past few weeks. Numerous A.CRE readers have actually emailed to ask for a [purpose-built Ground](https://riserealbali.com) [Lease Valuation](https://jassbrar.ca) Model. And I remain in the process of developing an [Advanced Concepts](https://commercialproperty.im) Module for our realty monetary [modeling Accelerator](https://pointlandrealty.com) program covering the mechanics of [modeling ground](https://www.redmarkrealty.com) leases. So I believed now would be a great time to share my Ground Lease [Valuation Model](https://therealoasis.com) in Excel.<br>
<br>This model can be used standalone, or included to your [existing property-level](https://fashionweekvenues.com) model. In any case, it is [helpful](http://mambotours.rs) for both to size a [ground lease](https://www.agentjill.com) payment or leasehold owners aiming to [comprehend](https://fortressrealtycr.com) the worth of the leasehold (i.e. improvements) relative to the cost basic interest (i.e. land).<br>[yahoo.com](https://advertising.yahoo.com/article/search-advertising.html)
<br>Excel design for examining a ground lease<br>
<br>What is a Ground Lease and Leasehold Interest?<br>
<br>If you not familiar with the principles of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our [Glossary](https://alranimproperties.com) of CRE Terms:<br>
<br>Ground lease - "A lease structure where an investor leases the land (i.e. ground) just. In the case of a ground lease, normally one party owns the land (i.e. cost basic interest) while a different party owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the enhancements for a prolonged amount of time (20 - 100 years)."<br>
<br>Leasehold Interest - "In realty, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the fee basic 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 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.<br>
<br>Ground leases are common to prime places, where landowners do not necessarily wish to sell but where they might not have the expertise (or desire) to operate. Thus, they lease the land to someone who owns and runs the enhancements 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 major cities.<br>
<br>Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, popular retail renters choose to develop and own their space however the designer doesn't necessarily desire to sell the land. So, the retail renter will agree to rent the ground for 40+ years and build their own building on the rented land. Banks, national restaurants in outparcels, and big department shops are examples of renters that typically concur to this structure.<br>
<br>Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling task.<br>
<br>How to Use the Ground Lease Valuation Model<br>
<br>All sections of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to enable you to place this model into your own property-level design to make it much easier to include a ground lease component to your analysis.<br>
<br>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 discover important links associated with the design.<br>
<br>The Ground Lease worksheet is separated into seven areas as detailed and explained listed below:<br>
<br>The Residential or commercial property Description section consists of five inputs related to the investment. These inputs are:<br>
<br>SF/M2 - In cell I3 go into whether the step of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in realty to add the name of the investment with (Ground Lease) to signify that the 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 variety of acres or hectares will than automatically be calculated in cell E6.
Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different person or entity. So for example, you might be considering acquiring the arrive at which a Target Superstore is constructed. Target owns the structure and is leasing the land for some extended duration of time. The overall rentable area of the structure is the 'Leasehold Net Rentable Area'.<br>
<br>Section 1 - Residential Or Commercial Property Description<br>
<br>The Investment Timing area includes 4 needed inputs and one optional inputs. These inputs belong to the chronology of the ground lease and investment.<br>
<br>Ground Lease Start Date - The month and year when the ground lease started. This should 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 start through ground lease maturity. This is the total length of the ground lease, not the number of years remaining. The optimum length is 100 years. Based upon the ground lease length, the model then calculates 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 equivalent to the Next Ground Lease Payment date, although the model was constructed 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 event you're analyzing a shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.<br>
<br>Section 2 - Investment Timing<br>
<br>The Ground Lease Terms area contains business terms of the ground lease, consisting of payment quantity, frequency, and lease increases. This area consists of five inputs plus the choice to manually model the lease payment quantities.<br>
<br>Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this amount might be for a yearly or monthly payment.
Lease Increase Method - The technique used to design rent boosts. This can either be: None - No lease boosts.
% Inc. - A percentage increase over the previous rent quantity.
$ Inc. - An amount boost over the previous rent amount.
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 select Custom and begin to alter the annual lease payment amounts in row 26, there is no way to revert back to another Lease Increase Method.<br>
<br>Section 3 - Ground Lease Terms<br>
<br>It is within the Valuation (Fee and Leasehold) area where you compute the reversion worth of the land (i.e. ground lease), the present worth 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 3 subsections.<br>
<br>Ground Lease Reversion Value - Within this subsection you model the worth of the residential or commercial property as if there was no ground lease. Or simply put, a common direct cap valuation of a property investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings originated from renting the enhancements, 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 concept being to get to 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 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 easy leasing expenses, it may consist of remodelling and leasing, or it may consist of taking down the structure and rebuilding something new. The idea is to show up at a 'Net Reversion Value (Nominal)' after representing the cost to retenant.
Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. development). 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 value used in the ground lease present worth estimation. It is computed by taking the residential or commercial property value web of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you desire to customize the reversion value.<br>
<br>Discount Rate - The discount rate at which to determine the present worth of the ground lease capital. Think of this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease investment.<br>
<br>Section 4 - Valuation (Fee and Leasehold)<br>
<br>The Ground Lease Returns (Unlevered) area enables you to calculate 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 simply one input. <br>
<br>Ground Lease Investment Cost - This is the expense to get land with a ground lease. It needs to include the acquisition expense, together with any other due diligence, closing, and pursuit expenses related to the investment.<br>
<br>After entering the Ground Lease Investment Cost, the area calculates five return metrics:<br>
<br>- Unlevered Internal Rate of Return
- Unlevered Equity Multiple
- Net Profit
Average Rate of Return
- Average Free-and-Clear Return<br>
<br>Note that the resulting returns are extremely depending on the analysis duration, payment schedule, and reversion worth.<br>
<br>Section 5 - Ground Lease Returns (Unlevered)<br>
<br>The Ground Lease Returns (Levered) section allows you to determine the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering 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 corresponding return from that levered financial investment. The area includes three inputs.<br>
<br>Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will determine the loan quantity.
- Annual Rate Of Interest - The annual rate to be paid on the mortgage. Note that the model presently just enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or each year.<br>
<br>After getting in the debt assumptions for the ground lease investment, the section determines five return metrics:<br>
<br>- - Levered Internal Rate of Return
- Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return<br>
<br>As with the unlevered analysis, the resulting returns are extremely depending on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise greatly drive the levered return. And as a reminder, for now the model only permits financial obligation with interest-only payments and a balloon at the end of the analysis period.<br>
<br>Section 6 - Ground Lease Returns (Levered)<br>
<br>The final area is where backend inputs used in the numerous information recognition lists are found. Unless you mean to modify the model, there is no reason to alter the worths in this section.<br>
<br>Section 7 - Data Validation<br>
<br>Video Walkthrough - Using the Ground Lease Valuation Model<br>
<br>In addition to the composed guidance above, I have actually assembled a brief video that walks you through the numerous sections of the model. Note that this video is based upon v1.0 of the model.<br>
<br>Download the Ground Lease Valuation Model<br>
<br>To make this model available to everybody, it is used on a "Pay What You're Able" basis without any minimum (enter $0 if you 'd like) or maximum (your support assists keep the material coming - common genuine estate appraisal designs cost $100 - $300+ per license). Just enter 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 models on this basis, please reach out to either Mike or Spencer.<br>
<br>We frequently upgrade the design (see version notes). Paid factors to the design get a brand-new download link through e-mail each time the model is upgraded.<br>
<br>Version Notes<br>
<br>Version 2.33<br>
<br>- Rewrote 'Flying Start Guide' with updates and for enhanced readability
- Updates to placeholder worths
- Fix to misspelled word on Version tab<br>
<br>Version 2.32<br>
<br>- Removed redundant information in E17: G17.
- Updated I22 to show more accurate years of term staying.
- Updates to placeholder values<br>
<br>Version 2.31<br>
<br>- Further modifications to logic in I59<br>
<br>Version 2.3<br>
<br>- Fixed problem where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing out on the last cell<br>
<br>Version 2.2<br>
<br>- 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<br>
<br>Version 2.1<br>
<br>- Updates to placeholder worths.
- Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for different areas.
- Misc. formatting updates<br>
<br>Version 2.0<br>
<br>- 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 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' presumption to permit for financier to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish 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 separate in between Valuations sections and Investment Returns sections.
- Adjusted return solutions to make vibrant to Investment Hold Period<br>
<br>Version 1.0<br>
<br>- Initial release<br>
<br>About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for business property. He has 20+ years of CRE experience and has actually financed over $30 billion in realty across leading institutional firms.<br>