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The subject of ground leases has shown up several times in the past few weeks. Numerous A.CRE readers have actually emailed to ask for a purpose-built Ground Model. And I'm 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.
This design can be used standalone, or contributed to your existing property-level design. Either way, it is valuable for both landowners wanting to size a ground lease payment or leasehold owners looking to understand the value of the leasehold (i.e. enhancements) relative to the cost simple interest (i.e. land).
Excel design for assessing a ground lease
What is a Ground Lease and Leasehold Interest?
If you unfamiliar with the principles 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 a real estate investor leases the land (i.e. ground) only. In the case of a ground lease, typically one party owns the land (i.e. charge basic interest) while a different party owns the improvements (i.e. leasehold interest). In many cases, 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 property, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the cost easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will generally own the improvements 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 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 areas, where landowners do not always want to offer but where they may 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 receive a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of significant cities.
Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, prominent retail renters choose to construct and own their space but the developer does not always desire to sell the land. So, the retail renter will consent to rent the ground for 40+ years and build their own building on the leased land. Banks, national restaurants in outparcels, and large department stores are examples of tenants that often consent to this structure.
Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling job.
How to Use the Ground Lease Valuation Model
All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to enable you to place this design into your own property-level design to make it much easier to include a ground lease part to your analysis.
All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can view a modification log for the design, as well as find important links connected to the model.
The Ground Lease worksheet is broken up into seven sections as described and explained listed below:
The Residential or commercial property Description area consists of 5 inputs associated to the investment. These inputs are:
SF/M2 - In cell I3 go into whether the measure of size remains in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the financial investment. It prevails in property to add the name of the investment with (Ground Lease) to signify that the financial investment is for the cost simple 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 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 assumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for example, you might be thinking about obtaining the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some prolonged amount 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 section consists of four needed inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and investment.
Ground Lease Start Date - The month and year when the ground lease commenced. This should 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 overall 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 determines the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to begin. This typically amounts to the Next Ground Lease Payment date, although the design was constructed to permit for 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, 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 company terms of the ground lease, including payment amount, frequency, and lease increases. This section consists of 5 inputs plus the choice to manually design the lease payment amounts.
Initial Payment Amount - The amount of the first lease payment. Depending upon the payment frequency input (see below), this quantity may be for a yearly or regular monthly payment.
Lease Increase Method - The technique used to model rent increases. This can either be: None - No lease increases.
% Inc. - A percentage boost over the previous rent amount.
$ Inc. - A quantity increase over the previous lease amount.
Custom - Manually design the rent payment quantities by year. If Custom is selected, the yearly rent 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 annual lease 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) section where you determine the reversion worth 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 five 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 simply put, a common direct cap appraisal of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings 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 here 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 enhancements 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 include easy leasing costs, it might include restoration and leasing, or it may include taking down the building and reconstructing something brand-new. The concept is to get here at a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant.
Reversion Growth Rate (Annually) - All of the above estimations 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 to a 'Reversion Value (Adjusted for Growth)' used as the reversion value in the ground lease present value computation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth estimation. It is calculated by taking the residential or commercial property value net of any retenanting expenses, and then growing it by a development rate. The worth is an optional input in case you wish to customize the reversion value.
Discount Rate - The discount rate at which to determine today value of the ground lease capital. Consider this discount rate as an obstacle rate (i.e. necessary rate of return) for a ground lease financial investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) area allows 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 section where you can enter your acquisition/investment cost, and see the matching returns from that investment. The section includes simply one input.
Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It ought to consist of the acquisition expense, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.
After entering the Ground Lease Investment Cost, the section calculates 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 based on the analysis duration, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) section enables you to calculate the levered (i.e. with financial obligation) returns of a ground lease investment. If you are thinking about purchasing a ground lease and mean to finance the purchase, it is within this area where you can get in the debt presumptions, and see the corresponding return from that levered financial investment. The section includes 3 inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan amount. - Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the design currently only enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or annually.
After going into the debt presumptions for the ground lease investment, the area computes 5 return metrics:
- - Levered Internal Rate of Return - Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return
Similar to the unlevered analysis, the resulting returns are extremely depending on the analysis period, payment schedule, and reversion worth. The quantity and rate of the debt will likewise greatly drive the levered return. And as a tip, for now the design only permits financial obligation with interest-only payments and a balloon at the end of the analysis duration.
Section 6 - Ground Lease Returns (Levered)
The last section is where backend inputs used in the numerous information recognition lists are discovered. Unless you mean to modify the model, there is no factor to alter the values 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 created a brief video that walks you through the numerous areas of the model. Note that this video is based upon v1.0 of the design.
Download the Ground Lease Valuation Model
To make this design accessible to everybody, it is used 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 material coming - typical property assessment designs cost $100 - $300+ per license). Just get in a cost together with an e-mail address to send 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 provide our designs on this basis, please reach out to either Mike or Spencer.
We routinely update the design (see version notes). Paid factors to the design get a brand-new download link via email each time the model is upgraded.
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 information in E17: G17. - Updated I22 to reflect more precise years of term remaining.
- Updates to placeholder values
Version 2.31
- Further modifications to reasoning in I59
Version 2.3
- Fixed problem where the OFFSET() range 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 worths
Version 2.1
- Updates to placeholder worths. - Added additional notes under 'Flying start Guide' to clarify common 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 'Flying Start Guide' to supply a tutorial for using the model.
- 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 permit investor to analyze returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish 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 format to much better differentiate in between Valuations areas and Investment Returns sections.
- Adjusted return formulas to make dynamic to Investment Hold Period
Version 1.0
indeed.com
- Initial release
About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for commercial realty. He has 20+ years of CRE experience and has actually financed over $30 billion in genuine estate throughout top institutional firms.