From 8e3c29017812dcfaa21abe9f37c9455cbed9979e Mon Sep 17 00:00:00 2001 From: Davis Barnum Date: Fri, 31 Oct 2025 03:30:27 +0100 Subject: [PATCH] Add Ground Lease Valuation Model (Updated Mar 2025). --- ...Valuation-Model-%28Updated-Mar-2025%29..md | 104 ++++++++++++++++++ 1 file changed, 104 insertions(+) create mode 100644 Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md diff --git a/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md b/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md new file mode 100644 index 0000000..9c3cd9e --- /dev/null +++ b/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md @@ -0,0 +1,104 @@ +
The topic of ground leases has actually come up numerous times in the previous few weeks. Numerous A.[CRE readers](https://mydhra.com) have emailed to ask for a purpose-built Ground Lease Valuation Model. And I remain in the [process](http://v1.kangrooo.com) of developing an Advanced Concepts Module for our property monetary [modeling](https://drhomeshow.com) Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my [Ground Lease](https://allmineestates.in) [Valuation](https://michigancountryrealestate.com) Model in Excel.
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This design can be [utilized](https://www.zambianhome.com) standalone, or [contributed](https://donprimo.ph) to your existing property-level model. In either case, it is helpful for both landowners seeking to size a ground lease payment or [leasehold owners](https://bulaliving-realestate.com) wanting to understand the worth of the [leasehold](https://newdoorinvestments.net) (i.e. improvements) relative to the cost simple interest (i.e. land).
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Excel model for assessing a ground lease
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What is a Ground Lease and Leasehold Interest?
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If you not familiar with the ideas of Ground Lease and Leasehold Interest, I'll refer you to the [meanings](https://goldenestate.am) in our [Glossary](https://listflips.com) of CRE Terms:
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[Ground lease](https://jrfrealty.com) - "A lease structure where a real estate financier leases the land (i.e. ground) just. In the case of a ground lease, normally one party owns the land (i.e. charge easy interest) while a separate celebration owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the improvements for an extended duration of time (20 - 100 years)."
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Interest - "In realty, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the cost simple owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will typically own the improvements on the land and use 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 rent to the lessor for usage of the land. At the end of the ground lease term, the lessee should return usage of the land, and any enhancements thereon, to the land owner.
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Ground leases prevail to prime areas, where landowners do not necessarily want to offer but where they might 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 get a ground lease payment in return. You see this on a regular basis with office structures in the downtown core of major cities.
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Another case where you'll run into ground leases are in retail shopping centers. Oftentimes, popular retail occupants prefer to build and own their area but the developer doesn't always wish to sell the land. So, the retail tenant will agree to lease the ground for 40+ years and develop their own structure on the leased land. Banks, nationwide restaurants in outparcels, and large department shops are examples of renters that frequently agree to this structure.
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Quick Note: Not thinking about DIY analysis? Consider working with A.CRE Consulting to handle your bespoke modeling job.
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How to Use the Ground Lease Valuation Model
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All areas of the Ground Lease Valuation Model are included on one worksheet. This is intentional to allow you to insert this design into your own property-level design to make it much easier to add a ground lease component to your analysis.
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All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise included where you can view a change log for the design, along with find essential links connected to the design.
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The Ground Lease worksheet is broken up into 7 sections as described and described below:
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The Residential or commercial property Description area consists of five inputs related to the investment. These inputs are:
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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 investment. It is typical in realty to add the name of the investment with (Ground Lease) to signify that the financial investment is for the charge simple 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 computed 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 assumed to be owned by one person or entity, and the leasehold interest (i.e. improvements) to be owned by a different individual or entity. So for circumstances, you may be considering obtaining the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some extended time period. The overall rentable area of the structure is the 'Leasehold Net Rentable Area'.
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Section 1 - Residential Or Commercial Property Description
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The Investment Timing area includes four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.
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Ground Lease Start Date - The month and year when the ground lease began. This must 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 commencement through ground lease maturity. This is the overall length of the ground lease, not the number of years remaining. The optimum length is 100 years. Based on 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 start. This normally is equivalent to the Next Ground Lease Payment date, although the design was developed 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 evaluating a shorter hold duration, just change the orange font cell I17 to the favored analysis end date.
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Section 2 - Investment Timing
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The Ground Lease Terms section consists of business regards to the ground lease, consisting of payment amount, frequency, and lease boosts. This section includes 5 inputs plus the option to by hand model the rent payment quantities.
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Initial Payment Amount - The amount of the first lease payment. Depending on the payment frequency input (see below), this quantity might be for an annual or month-to-month payment. +Lease Increase Method - The technique utilized to design rent increases. This can either be: None - No rent increases. +% Inc. - A percentage boost over the previous lease quantity. +$ Inc. - An amount increase over the previous rent amount. +Custom - Manually design the rent payment quantities by year. If Custom is chosen, the yearly lease payment quantities in row 26 end up being inputs for you to by hand change (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 other way to revert back to another Lease Increase Method.
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Section 3 - Ground Lease Terms
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It is within the Valuation (Fee and Leasehold) section 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 worth of the leasehold interest. This area is separated into three subsections, with five inputs and one optional input throughout the three subsections.
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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 in other words, a typical direct cap appraisal of a property investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating earnings derived from renting 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 included. The concept being to come to a worth 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 simple leasing costs, it might consist of renovation and leasing, or it may consist of taking down the building and restoring something brand-new. The concept is to get here at a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. +Reversion Growth Rate (Each Year) - All of the above computations are done before accounting for inflation (i.e. growth). Enter a development 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 worth computation. +Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present value computation. It is determined 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 the occasion you wish to personalize the reversion worth.
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Discount Rate - The discount rate at which to calculate today worth of the ground lease money flows. Think of this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease financial investment.
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Section 4 - Valuation (Fee and Leasehold)
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The Ground Lease Returns (Unlevered) area enables you to calculate the unlevered (i.e. before debt) 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 includes simply one input.
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Ground Lease Investment Cost - This is the expense to obtain land with a ground lease. It must consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses associated with the investment.
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After going into the Ground Lease Investment Cost, the section determines five return metrics:
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- Unlevered Internal Rate of Return +- Unlevered Equity Multiple +- Net Profit +Average Rate of Return +- Average Free-and-Clear Return
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Note that the resulting returns are highly based on the analysis duration, payment schedule, and reversion worth.
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Section 5 - Ground Lease Returns (Unlevered)
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The Ground Lease Returns (Levered) area enables you to determine the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease and mean to fund the purchase, it is within this section where you can enter the debt presumptions, and see the matching return from that levered investment. The section includes three inputs.
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Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan amount. +- Annual Rates Of Interest - The annual rate to be paid on the mortgage. Note that the model currently only permits an interest-only loan. +- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or annually.
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After entering the debt assumptions for the ground lease investment, the area calculates five return metrics:
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- - Levered Internal Rate of Return +- Levered Equity Multiple +- Net Profit +- Average Rate of Return +- Average Cash-on-Cash Return
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Similar to the unlevered analysis, the resulting returns are extremely based on the analysis duration, payment schedule, and reversion value. The quantity and rate of the debt will likewise heavily drive the levered return. And as a suggestion, for now the model only allows for debt with interest-only payments and a balloon at the end of the analysis period.
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Section 6 - Ground Lease Returns (Levered)
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The final area is where backend inputs utilized in the numerous information validation lists are discovered. Unless you intend to customize the design, there is no factor to change the worths in this section.
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Section 7 - Data Validation
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Video Walkthrough - Using the Ground Lease Valuation Model
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In addition to the written assistance above, I have actually assembled a short video that strolls you through the numerous areas of the design. Note that this video is based on v1.0 of the model.
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Download the Ground Lease Valuation Model
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To make this model accessible to everybody, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or optimum (your assistance helps keep the content coming - typical realty appraisal models cost $100 - $300+ per license). Just go into 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 use our models on this basis, please reach out to either Mike or Spencer.
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We routinely upgrade the design (see version notes). Paid contributors to the model receive a new download link via e-mail each time the design is upgraded.
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Version Notes
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Version 2.33
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- Rewrote 'Quick Start Guide' with updates and for enhanced readability +- Updates to placeholder worths +- Fix to misspelled word on Version tab
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Version 2.32
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- Removed redundant information in E17: G17. +- Updated I22 to show more accurate years of term remaining. +- Updates to placeholder worths
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Version 2.31
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- Further revisions to logic in I59
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Version 2.3
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- Fixed concern where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing out on the last cell
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Version 2.2
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- Revised formula in M26: DG26 to fix for issue when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!). +- Updates to placeholder values
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Version 2.1
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- Updates to placeholder values. +- Added additional notes under 'Quick Start Guide' to clarify common confusion around start dates for different sections. +- Misc. formatting updates
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Version 2.0
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- 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 design. +- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification functions. +- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'. +- Added 'Investment Term' presumption to permit investor to examine returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate between evaluation and 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 much better separate between Valuations areas and Investment Returns sections. +- Adjusted return solutions to make vibrant to Investment Hold Period
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Version 1.0
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- Initial release
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About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for business genuine estate. He has 20+ years of CRE experience and has underwritten over $30 billion in property throughout top institutional companies.
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