The subject of ground leases has come up several times in the previous few weeks. Numerous A.CRE readers have emailed to request a purpose-built Ground Lease Valuation Model. And I remain in the process of developing an Advanced Concepts Module for our real estate financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my Ground Lease Valuation Model in Excel.

This model can be utilized standalone, or added to your existing property-level model. In either case, it is valuable for both landowners wanting to size a ground lease payment or leasehold owners looking to comprehend the value of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).

Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar 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 genuine estate financier rents the land (i.e. ground) only. In the case of a ground lease, generally one celebration owns the land (i.e. charge basic interest) while a different 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 a prolonged time period (20 - 100 years)."

Leasehold Interest - "In real estate, a leasehold interest describes a structure where a specific or entity (lessee) rents the land (i.e. ground lease) from the cost simple owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will generally own the enhancements on the land and utilize 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 must return use of the land, and any enhancements thereon, to the land owner.

Ground leases are typical to prime areas, where landowners don't necessarily wish to sell but where they may not have the know-how (or desire) to operate. 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 structures in the downtown core of major cities.

Another case where you'll encounter ground leases are in retail shopping mall. Oftentimes, prominent retail tenants prefer to build and own their area however the developer does not necessarily want to offer the land. So, the retail tenant will agree to lease the ground for 40+ years and construct their own building on the leased land. Banks, nationwide restaurants in outparcels, and big department stores are examples of tenants that typically accept this structure.

Quick Note: Not interested in DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling project.

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to enable you to insert this design into your own property-level model to make it simpler to add a ground lease component to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is also consisted of where you can see a change log for the model, along with find essential links related to the model.

The Ground Lease worksheet is broken up into seven areas as detailed and described below:

The Residential or commercial property Description area consists of 5 inputs related to the financial investment. These inputs are:

SF/M2 - In cell I3 enter whether the step 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 append the name of the financial investment with (Ground Lease) to denote that the financial investment is for the charge 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 number of acres or hectares will than immediately be computed 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 individual or entity, and the leasehold interest (i.e. enhancements) to be owned by a different person or entity. So for circumstances, you might be thinking about obtaining the arrive on which a Target Superstore is developed. Target owns the building and is renting the land for some extended period 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 includes 4 required inputs and one optional inputs. These inputs are related 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 staying. The maximum length is 100 years. Based on the ground lease length, the design then computes the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This usually amounts to the Next Ground Lease Payment date, although the model 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 the event you're evaluating a shorter hold duration, just alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area contains the organization terms of the ground lease, including payment amount, frequency, and rent boosts. This section includes 5 inputs plus the alternative to manually model the rent payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see below), this quantity might be for an annual or month-to-month payment.
Lease Increase Method - The approach used to model rent boosts. This can either be: None - No lease boosts.
% Inc. - A percentage increase over the previous rent amount.
$ Inc. - A quantity boost over the previous lease amount.
Custom - Manually design the lease payment amounts by year. If Custom is picked, the annual lease payment amounts in row 26 become inputs for you to manually alter (i.e. font style turns blue). Important Note: If you pick Custom and begin to change the annual rent payment quantities in row 26, there is no way 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 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 three subsections, with five inputs and one optional input across 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 normal 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 obtained from leasing 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 consisted of. The idea being to get to a value 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 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 may consist of easy leasing costs, it might consist of restoration and leasing, or it might include tearing down the building and restoring something brand-new. The concept is to come to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant.
Reversion Growth Rate (Per Year) - All of the above estimations 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)' utilized as the reversion worth in the ground lease present value calculation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present value calculation. It is determined by taking the residential or commercial property value web of any retenanting expenses, and then growing it by a growth rate. The worth is an optional input in case you want to customize the reversion value.

Discount Rate - The discount rate at which to determine the present value of the ground lease money circulations. Think of this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease financial 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 buying a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The section consists of just one input.

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

After going into the Ground Lease Investment Cost, the area 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 period, payment schedule, and reversion worth.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) area allows you to calculate the levered (i.e. with debt) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to finance the purchase, it is within this area where you can get in the debt assumptions, and see the matching return from that levered financial investment. The section includes 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 annual rate to be paid on the mortgage. Note that the model presently only enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or every year.

After going into the financial obligation 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 dependent on the analysis period, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a reminder, in the meantime 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 final section is where backend inputs utilized in the various data recognition lists are discovered. Unless you mean to modify the model, there is no reason to alter 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 brief video that walks you through the numerous sections of the design. Note that this video is based upon v1.0 of the model.

Download the Ground Lease Valuation Model

To make this design accessible to everyone, it is used on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your support helps keep the material coming - common realty assessment models sell for $100 - $300+ per license). Just get in a rate together with an email address to send out the download link to, and then click 'Continue'. If you have any concerns about our "Pay What You're Able" program or why we offer our designs on this basis, please connect to either Mike or Spencer.

We frequently update the model (see version notes). Paid contributors to the model get a brand-new download link by means of email each time the design is upgraded.

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 reflect more precise years of term remaining.
- Updates to placeholder values

Version 2.31

- Further revisions to reasoning in I59

Version 2.3

- Fixed problem where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell

Version 2.2

- Revised formula in M26: DG26 to fix for concern 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 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 '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' presumption to permit investor to evaluate returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between valuation and 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 distinguish between Valuations sections and Investment Returns sections.
- Adjusted return formulas to make dynamic 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 colleagues for commercial realty. He has 20+ years of CRE experience and has financed over $30 billion in property across leading institutional companies.