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Add Ground Lease Valuation Model (Updated Mar 2025).

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<br>The [subject](https://preconcentral.com) of ground leases has shown up numerous times in the past few weeks. Numerous A.CRE readers have emailed to request for a [purpose-built Ground](https://kopenaandecosta.nl) Lease Valuation Model. And I remain in the process of [developing](https://www.properush.com) an Advanced Concepts Module for our property financial modeling Accelerator program covering the mechanics of [modeling ground](https://areafada.com) leases. So I believed now would be a great time to share my Ground Lease [Valuation](https://topdom.rs) Model in Excel.<br>
<br>This design can be utilized standalone, or added to your existing property-level design. In either case, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners seeking to comprehend the value of the [leasehold](https://jacorealty.com) (i.e. improvements) [relative](https://inpattaya.net) to the [charge easy](https://reswis.com) interest (i.e. land).<br>
<br>[Excel model](https://negomboproperty.lk) for [evaluating](https://www.vibhaconsultancy.com) a ground lease<br>
<br>What is a [Ground Lease](https://luxuryproperties.in) and Leasehold Interest?<br>
<br>If you unfamiliar with the ideas of Ground Lease and Leasehold Interest, you to the definitions in our Glossary of CRE Terms:<br>
<br>Ground lease - "A lease structure where a real estate investor rents the land (i.e. ground) just. When it comes to a ground lease, generally one party owns the land (i.e. cost easy interest) while a different party owns the improvements (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](https://propcart.co.ke) Interest - "In real estate, a leasehold interest describes 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 time period. The lessee of a leasehold estate will normally 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 lease to the lessor for usage 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 prevail to prime locations, where landowners do not always wish to offer but where they might not have the expertise (or desire) to run. Thus, they rent the land to somebody who owns and operates the enhancements on the land, and receive a ground lease payment in return. You see this rather frequently with workplace buildings in the downtown core of major cities.<br>
<br>Another case where you'll face ground leases are in retail shopping centers. Oftentimes, popular retail occupants choose to develop and own their space but the designer doesn't always want to offer the land. So, the retail renter will accept rent the ground for 40+ years and construct their own structure on the rented land. Banks, nationwide dining establishments in outparcels, and large department shops are examples of tenants that typically consent to this structure.<br>
<br>Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling job.<br>
<br>How to Use the Ground Lease Valuation Model<br>
<br>All areas of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to enable you to place this design into your own property-level design to make it easier to include a ground lease part to your analysis.<br>
<br>All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can view a modification log for the design, as well as discover important links associated with the design.<br>
<br>The Ground Lease worksheet is separated into seven sections as detailed and described below:<br>
<br>The Residential or commercial property Description area consists of five inputs associated to the financial investment. These inputs are:<br>
<br>SF/M2 - In cell I3 enter whether the step of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in property to add the name of the financial investment with (Ground Lease) to denote that the 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 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for circumstances, you may be considering acquiring the land on which a Target Superstore is constructed. Target owns the building and is renting the land for some extended amount of time. The total 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 required inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and investment.<br>
<br>Ground Lease Start Date - The month and year when the ground lease began. 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 start through ground lease maturity. This is the total length of the ground lease, not the number 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 begin. This generally amounts 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 evaluating 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 includes the business regards to the ground lease, consisting of payment quantity, frequency, and rent increases. This area consists of 5 inputs plus the alternative to by hand design the rent payment quantities.<br>
<br>Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this amount may be for an annual or monthly payment.
Lease Increase Method - The approach utilized to model rent boosts. This can either be: None - No lease increases.
% Inc. - A portion increase over the previous rent amount.
$ Inc. - An amount boost over the previous lease quantity.
Custom - Manually model the rent payment amounts by year. If Custom is picked, the annual lease payment quantities in row 26 become inputs for you to manually alter (i.e. font style turns blue). Important Note: If you choose Custom and begin to change the yearly 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 calculate the reversion value of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is broken up into three 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 normal direct cap valuation of a genuine estate financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating earnings stemmed from leasing the improvements, 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 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 return 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 include basic leasing costs, it might include remodelling and leasing, or it might include tearing down the building and rebuilding something new. The concept is to arrive at 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 accounting for inflation (i.e. growth). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to come to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present value calculation.
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 value internet of any retenanting expenses, and then growing it by a growth rate. The worth is an optional input in the event you want to customize the reversion value.<br>
<br>Discount Rate - The discount rate at which to calculate the present value of the ground lease capital. Think of this discount rate as a difficulty 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 permits you to compute the unlevered (i.e. before debt) returns of a ground lease 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 corresponding returns from that financial investment. The area includes simply one input. <br>
<br>Ground Lease Investment Cost - This is the expense to acquire land with a ground lease. It should consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the investment.<br>
<br>After getting in the Ground Lease Investment Cost, the section determines 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 highly based on the analysis duration, payment schedule, and reversion value.<br>
<br>Section 5 - Ground Lease Returns (Unlevered)<br>
<br>The Ground Lease Returns (Levered) area allows you to compute the levered (i.e. with financial obligation) returns of a ground lease investment. If you are considering buying a ground lease and intend to fund the purchase, it is within this section where you can go into the financial obligation presumptions, and see the corresponding return from that levered investment. The section includes three inputs.<br>
<br>Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan quantity.
- Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the model presently just permits an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or yearly.<br>
<br>After entering the debt presumptions for the ground lease investment, the area calculates 5 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>Just like the unlevered analysis, the resulting returns are extremely depending on the analysis duration, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise heavily 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 last area is where backend inputs utilized in the different information validation lists are discovered. Unless you mean to modify the model, there is no reason to alter the values 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 put together a short video that walks you through the numerous sections of the design. Note that this video is based on v1.0 of the design.<br>
<br>Download the Ground Lease Valuation Model<br>
<br>To make this design available to everyone, it is provided on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your support assists keep the material coming - common real estate valuation models sell for $100 - $300+ per license). Just go into a cost together with an e-mail 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 use our designs on this basis, please connect to either Mike or Spencer.<br>
<br>We frequently update the model (see version notes). Paid factors to the design get a brand-new download link through e-mail each time the model is updated.<br>
<br>Version Notes<br>
<br>Version 2.33<br>
<br>- Rewrote 'Flying Start Guide' with updates and for improved 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 precise years of term remaining.
- Updates to placeholder worths<br>
<br>Version 2.31<br>
<br>- Further modifications to logic in I59<br>[wikipedia.org](http://en.wikipedia.org/wiki/Steve_Condos)
<br>Version 2.3<br>
<br>- Fixed issue where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing 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 worths<br>
<br>Version 2.1<br>
<br>- Updates to placeholder values.
- Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for different sections.
- Misc. formatting updates<br>
<br>Version 2.0<br>
<br>- Moved 'Analysis Start', 'Analysis Period', and 'Analysis End' inputs above Ground Lease dates for improved user experience.
- Added a 'Quick Start Guide' to provide a tutorial for utilizing the model.
- 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' assumption to permit investor to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between valuation 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 better differentiate in between Valuations areas and Investment Returns sections.
- Adjusted return solutions to make dynamic 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 colleagues for business genuine estate. He has 20+ years of CRE experience and has actually financed over $30 billion in realty across top institutional companies.<br>