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Ground Lease Valuation Model (Updated Mar 2025).<\/strong><\/p>\n

The topic of ground leases has turned up numerous<\/a> times in the past few weeks. Numerous A.CRE readers have actually emailed<\/a> to request a purpose-built Ground<\/a> Lease Valuation<\/a> Model. And I’m in the procedure of producing an Advanced Concepts Module for our property financial modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be an excellent<\/a> time to share my Ground Lease Valuation<\/a> Model in Excel.<\/p>\n

This design can be utilized standalone, or contributed<\/a> to your existing property-level model. In any case, it is useful for both looking to size a ground lease payment or leasehold owners looking to comprehend<\/a> the value of the leasehold (i.e. enhancements) relative to the fee simple interest (i.e. land).<\/p>\n

Excel model for assessing a ground lease<\/p>\n

What is a Ground Lease<\/a> and Leasehold Interest?<\/p>\n

<\/p>\n

If you unfamiliar<\/a> with the ideas of Ground Lease and Leasehold Interest, I’ll refer you to the meanings in our Glossary of CRE Terms:<\/p>\n

Ground lease – “A lease structure where an investor leases the land (i.e. ground) just. When it comes to a ground lease, generally one celebration owns the land (i.e. fee basic interest) while a different celebration owns the enhancements (i.e. leasehold interest). Most of the times, the owner of the land rents the land to the owner of the improvements for an extended period of time (20 – 100 years).”<\/p>\n

Leasehold<\/a> 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 fee easy 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 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 usage of the land, and any enhancements thereon, to the land owner.<\/p>\n

Ground leases prevail to prime places, where landowners do not always wish to sell but where they might not have the expertise (or desire) to run. Thus, they lease the land to somebody who owns and runs the enhancements on the land, and get a ground lease payment in return. You see this quite frequently with workplace structures in the downtown core of major cities.<\/p>\n

Another case where you’ll run into ground leases are in retail shopping centers. Oftentimes, popular retail renters prefer to build and own their area but the designer doesn’t necessarily want to offer the land. So, the retail renter will concur to rent the ground for 40+ years and develop their own building on the rented land. Banks, national dining establishments in outparcels, and large department stores are examples of tenants that frequently accept this structure.<\/p>\n

Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to handle your bespoke modeling task.<\/p>\n

How to Use the Ground Lease Valuation Model<\/p>\n

All areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to permit you to insert this model into your own property-level model to make it simpler to add a ground lease component to your analysis.<\/p>\n

All analysis is performed on the tab entitled ‘Ground Lease’. A ‘Version’ tab is also included where you can view a change log for the model, in addition to find crucial links associated with the model.<\/p>\n

The Ground Lease worksheet is broken up into 7 areas as laid out and described below:<\/p>\n

The Residential or commercial property Description section includes five inputs related to the investment. These inputs are:<\/p>\n

SF\/M2 – In cell I3 enter whether the procedure of size remains in square feet (SF) or square meters (M2).
\nResidential or commercial property Name – Name of the investment. It is typical in realty to add the name of the investment with (Ground Lease) to represent that the financial investment is for the fee simple interest in land with a ground lease.
\nAddress – Address, city, state\/province, zip\/postal code, and country.
\nLand Size – Total SF or M2 of land. The variety of acres or hectares will than automatically be computed in cell E6.
\nLeasehold 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 person or entity, and the leasehold interest (i.e. improvements) to be owned by a different person or entity. So for example, you may be considering getting the arrive at which a Target Superstore is built. Target owns the structure and is renting the land for some extended amount of time. The overall rentable location of the building is the ‘Leasehold Net Rentable Area’.<\/p>\n

Section 1 – Residential Or Commercial Property Description<\/p>\n

The Investment Timing area consists of four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.<\/p>\n

Ground Lease Start Date – The month and year when the ground lease began. This should likewise be the month and year of the very first payment.
\nNext Ground Lease Payment – The month and year when the next ground lease payment is due.
\nGround Lease Length (Years) – The length of the ground lease in years from ground lease start through ground lease maturity. This is the overall length of the ground lease, not the number of years staying. The maximum length is 100 years. Based upon the ground lease length, the model then computes the Ground Lease End Date (i.e. maturity date).
\nAnalysis 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 built to enable analysis to start prior to the Next Ground Lease Payment date.
\nAnalysis End Date – An optional input, this is by default the Ground Lease End Date. In the occasion you’re analyzing a much shorter hold period, just alter the orange font cell I17 to the favored analysis end date.<\/p>\n

Section 2 – Investment Timing<\/p>\n

The Ground Lease Terms area includes the organization terms of the ground lease, including payment amount, frequency, and lease increases. This area includes 5 inputs plus the alternative to by hand model the lease payment quantities.<\/p>\n

Initial Payment Amount – The quantity of the first lease payment. Depending on the payment frequency input (see below), this amount might be for an annual or monthly payment.
\nLease Increase Method – The approach used to model lease increases. This can either be: None – No lease boosts.
\n% Inc. – A portion boost over the previous rent quantity.
\n$ Inc. – An amount boost over the previous rent amount.
\nCustom – Manually design the lease payment quantities by year. If Custom is picked, the annual rent payment amounts in row 26 become inputs for you to manually alter (i.e. font turns blue). Important Note: If you pick Custom and begin to alter the annual lease payment quantities in row 26, there is no chance to revert back to another Lease Increase Method.<\/p>\n

Section 3 – Ground Lease Terms<\/p>\n

It is within the Valuation (Fee and Leasehold) area where you calculate 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 section is separated into three subsections, with five inputs and one optional input throughout the 3 subsections.<\/p>\n

Ground Lease Reversion Value – Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a typical direct cap evaluation of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) – Enter the yearly net operating earnings originated from leasing the enhancements, exclusive of any ground lease payment.
\nMarket Cap Rate – The cap rate for the residential or commercial property, as if no ground lease was included. The concept being to show up at a worth of the residential or commercial property before representing the ground lease.
\nRetenanting 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 cost (i.e. before inflation). Retenanting may include easy leasing costs, it might consist of renovation and leasing, or it might include taking apart the structure and restoring something brand-new. The concept is to reach a ‘Net Reversion Value (Nominal)’ after representing the cost to retenant.
\nReversion Growth Rate (Each Year) – All of the above calculations are done before representing 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)’ used as the reversion worth in the ground lease present worth calculation.
\nReversion Value (Adjusted for Growth) – Optional Input. The reversion value used in the ground lease present value estimation. It is calculated by taking the residential or commercial property value internet of any retenanting costs, and then growing it by a development rate. The worth is an optional input in case you wish to customize the reversion value.<\/p>\n

Discount Rate – The discount rate at which to determine the present worth of the ground lease cash flows. Think of this discount rate as a difficulty rate (i.e. necessary rate of return) for a ground lease financial investment.<\/p>\n

Section 4 – Valuation (Fee and Leasehold)<\/p>\n

The Ground Lease Returns (Unlevered) section allows you to determine the unlevered (i.e. before financial obligation) returns of a ground lease financial investment. If you are thinking about purchasing a ground lease, it is within this area where you can enter your acquisition\/investment expense, and see the corresponding returns from that financial investment. The area includes just one input. <\/p>\n

Ground Lease Investment Cost – This is the cost to get land with a ground lease. It ought to include the acquisition cost, together with any other due diligence, closing, and pursuit costs connected to the investment.<\/p>\n

After entering the Ground Lease Investment Cost, the section calculates 5 return metrics:<\/p>\n

– Unlevered Internal Rate of Return
\n– Unlevered Equity Multiple
\n– Net Profit
\nAverage Rate of Return
\n– Average Free-and-Clear Return<\/p>\n

<\/p>\n

Note that the resulting returns are extremely dependent on the analysis period, payment schedule, and reversion worth.<\/p>\n

Section 5 – Ground Lease Returns (Unlevered)<\/p>\n

The Ground Lease Returns (Levered) section permits you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are thinking about acquiring a ground lease and mean to finance the purchase, it is within this area where you can go into the debt presumptions, and see the matching return from that levered investment. The section consists of 3 inputs.<\/p>\n

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan amount.
\n– Annual Interest Rate – The yearly rate to be paid on the mortgage. Note that the design presently only permits an interest-only loan.
\n– Interest-Only Payment (Annual vs. Monthly) – Enter whether the mortgage payment will be due regular monthly or every year.<\/p>\n

After going into the financial obligation presumptions for the ground lease investment, the section computes 5 return metrics:<\/p>\n

– – Levered Internal Rate of Return
\n– Levered Equity Multiple
\n– Net Profit
\n– Average Rate of Return
\n– Average Cash-on-Cash Return<\/p>\n

Just like the unlevered analysis, the resulting returns are highly depending on the analysis duration, payment schedule, and reversion worth. The amount and rate of the debt will likewise heavily drive the levered return. And as a reminder, for now the design just enables debt with interest-only payments and a balloon at the end of the analysis period.<\/p>\n

Section 6 – Ground Lease Returns (Levered)<\/p>\n

The last area is where backend inputs used in the different information recognition lists are discovered. Unless you plan to modify the model, there is no factor to change the values in this section.<\/p>\n

Section 7 – Data Validation<\/p>\n

Video Walkthrough – Using the Ground Lease Valuation Model<\/p>\n

In addition to the written guidance above, I’ve created a short video that strolls you through the various areas of the design. Note that this video is based upon v1.0 of the model.<\/p>\n

Download the Ground Lease Valuation Model<\/p>\n

To make this model accessible to everyone, it is provided on a “Pay What You’re Able” basis without any minimum (get in $0 if you ‘d like) or maximum (your assistance helps keep the content coming – normal realty 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 concerns 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.<\/p>\n

<\/p>\n

We regularly upgrade the design (see version notes). Paid contributors to the model receive a brand-new download link through e-mail each time the model is upgraded.<\/p>\n

Version Notes<\/p>\n

Version 2.33<\/p>\n

– Rewrote ‘Quick Start Guide’ with updates and for improved readability
\n– Updates to placeholder values
\n– Fix to misspelled word on Version tab<\/p>\n

Version 2.32<\/p>\n

<\/p>\n

– Removed redundant details in E17: G17.
\n– Updated I22 to show more accurate years of term remaining.
\n– Updates to placeholder worths<\/p>\n

Version 2.31<\/p>\n

– Further modifications to reasoning in I59<\/p>\n

Version 2.3<\/p>\n

– Fixed concern where the OFFSET() range in the optional formula for ‘Reversion Value’ (I59) was missing out on the last cell<\/p>\n

Version 2.2<\/p>\n

– Revised formula in M26: DG26 to resolve for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
\n– Updates to placeholder values<\/p>\n

Version 2.1<\/p>\n

– Updates to placeholder values.
\n– Added additional notes under ‘Quick Start Guide’ to clarify common confusion around start dates for various areas.
\n– Misc. formatting updates<\/p>\n

Version 2.0<\/p>\n

– Moved ‘Analysis Start’, ‘Analysis Period’, and ‘Analysis End’ inputs above Ground Lease dates for enhanced user experience.
\n– Added a ‘Flying Start Guide’ to provide a tutorial for utilizing the design.
\n– Renamed ‘Lease Increase Method’ to ‘Lease Payment Increase Method’ for information functions.
\n– Renamed ‘Ground Lease Reversion Value’ to ‘Current Fee Simple Value and Ground Lease Reversion Value’.
\n– Added ‘Investment Term’ presumption to allow for financier to analyze returns on an Analysis Period much shorter than the Ground Lease term – Renamed ‘Investment Timing’ to ‘Valuation Timing’ to distinguish between evaluation and investment returns.
\n– Renamed ‘Analysis Start Date’ to ‘Valuation Start Date’, ‘Analysis Period’ to ‘Valuation Period’, and ‘Analysis End’ to ‘Valuation End’.
\n– Updated heading formatting to better differentiate in between Valuations areas and Investment Returns sections.
\n– Adjusted return solutions to make vibrant to Investment Hold Period<\/p>\n

Version 1.0<\/p>\n

<\/p>\n

– Initial release<\/p>\n

About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital coworkers for industrial property. He has 20+ years of CRE experience and has underwritten over $30 billion in genuine estate throughout leading institutional companies.<\/p>\n

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