From ce02f091ba3f3d550aad1bd7586ae06351e72d01 Mon Sep 17 00:00:00 2001 From: karrygleadow18 Date: Wed, 20 Aug 2025 01:11:53 +0800 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..be2f05f --- /dev/null +++ b/Ground-Lease-Valuation-Model-%28Updated-Mar-2025%29..md @@ -0,0 +1,104 @@ +
The subject of ground leases has actually come up numerous times in the previous couple of weeks. Numerous A.CRE readers have actually emailed to request a purpose-built Ground Lease Valuation Model. And I'm in the procedure of producing an Advanced Concepts Module for our real estate monetary modeling Accelerator program [covering](https://vreaucazare.ro) the [mechanics](https://ddpmsol.com) of [modeling ground](https://www.22401414.com) leases. So I believed now would be a great time to share my Ground Lease [Valuation](https://ads.goldenfutureoman.com) Model in Excel.
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This design can be utilized standalone, or contributed to your existing property-level design. Either method, it is practical for both [landowners aiming](https://properties.shabs.co.za) to size a ground lease payment or [leasehold owners](https://www.proyectobienes.net) wanting to [comprehend](https://restosales.net) the worth of the leasehold (i.e. improvements) [relative](https://number1property.com) to the cost basic interest (i.e. land).
[usa.gov](https://www.usa.gov/finding-home) +
[Excel design](https://setiaskyvista.com) for evaluating a ground lease
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What is a Ground Lease and Leasehold Interest?
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If you unfamiliar with the principles of and Leasehold Interest, I'll refer you to the definitions in our [Glossary](https://spanishloveshackproperties.com) of CRE Terms:
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Ground lease - "A lease structure where a real estate financier leases the land (i.e. ground) only. In the case of a ground lease, typically one celebration owns the land (i.e. charge simple interest) while a separate party owns the enhancements (i.e. leasehold interest). In many cases, the owner of the land leases the land to the owner of the enhancements for an extended duration of time (20 - 100 years)."
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Leasehold Interest - "In property, a leasehold interest describes a structure where an individual or entity (lessee) rents the land (i.e. ground lease) from the cost basic owner (lessor) of the land for a prolonged period of time. The lessee of a leasehold estate will usually own the enhancements on the land and utilize the land and improvements as if the lessee were the owner of the land. During the term of the ground lease, the lessee will pay lease to the lessor for use of the land. At the end of the ground lease term, the lessee should return use of the land, and any enhancements thereon, to the land owner.
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Ground leases are typical to prime areas, where landowners don't necessarily desire to sell however where they may not have the know-how (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 frequently with office complex in the downtown core of significant cities.
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Another case where you'll encounter ground leases remain in retail shopping mall. Oftentimes, popular retail occupants prefer to develop and own their area however the developer does not necessarily wish to offer the land. So, the retail occupant will consent to rent the ground for 40+ years and construct their own structure on the leased land. Banks, national dining establishments in outparcels, and large outlet store are examples of renters that frequently concur to this structure.
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Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling project.
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How to Use the Ground Lease Valuation Model
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All sections of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to permit you to insert this design into your own property-level model to make it much easier to include a ground lease part 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 see a change log for the model, in addition to discover crucial links related to the design.
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The Ground Lease worksheet is broken up into seven areas as detailed and explained below:
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The Residential or commercial property Description section consists of five inputs associated to the investment. These inputs are:
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SF/M2 - In cell I3 get in 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 is common in realty to add the name of the investment with (Ground Lease) to represent that the financial investment is for the fee basic 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 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 presumed to be owned by one individual or entity, and the leasehold interest (i.e. improvements) to be owned by a different individual or entity. So for example, you might be thinking about getting the arrive on which a Target Superstore is built. Target owns the building and is leasing the land for some prolonged period of time. The total 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 4 required inputs and one optional inputs. These inputs belong 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 started. This must likewise 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 commencement through ground lease maturity. This is the total length of the ground lease, not the number of years remaining. The optimum length is 100 years. Based upon the ground lease length, the design then calculates 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 model was constructed to enable 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, simply change the orange font cell I17 to the preferred analysis end date.
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Section 2 - Investment Timing
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The Ground Lease Terms section consists of the service terms of the ground lease, including payment amount, frequency, and lease boosts. This area consists of five inputs plus the choice to manually design the lease payment quantities.
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Initial Payment Amount - The quantity of the first lease payment. Depending on the payment frequency input (see below), this quantity may be for a yearly or regular monthly payment. +Lease Increase Method - The approach utilized to design rent boosts. This can either be: None - No lease increases. +% Inc. - A percentage boost over the previous lease amount. +$ Inc. - An amount increase over the previous lease amount. +Custom - Manually model the lease payment amounts by year. If Custom is chosen, the annual lease payment quantities in row 26 become inputs for you to manually change (i.e. font turns blue). Important Note: If you pick Custom and begin to change the yearly rent payment quantities in row 26, there is no chance 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 value of the land (i.e. ground lease), the present worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is broken up into 3 subsections, with five inputs and one optional input across the 3 subsections.
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Ground Lease Reversion Value - Within this subsection you model the value of the residential or commercial property as if there was no ground lease. Or to put it simply, a typical direct cap valuation of a realty investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income originated 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 included. The idea 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 return 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 may include easy leasing costs, it may consist of restoration and leasing, or it might consist of taking apart the building and rebuilding something brand-new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for the expense to retenant. +Reversion Growth Rate (Each Year) - All of the above calculations 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)' used as the reversion value in the ground lease present value estimation. +Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth calculation. It is determined by taking the residential or commercial property value web of any retenanting costs, and then growing it by a development rate. The value is an optional input in case you wish to customize the reversion value.
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Discount Rate - The discount rate at which to determine the present value of the ground lease cash flows. Think about this discount rate as an obstacle rate (i.e. necessary rate of return) for a ground lease investment.
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Section 4 - Valuation (Fee and Leasehold)
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The Ground Lease Returns (Unlevered) area permits you to compute the unlevered (i.e. before debt) returns of a ground lease financial investment. If you are thinking about buying a ground lease, it is within this section where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The area consists of simply one input.
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Ground Lease Investment Cost - This is the cost to get land with a ground lease. It ought to consist of the acquisition cost, together with any other due diligence, closing, and pursuit expenses connected to the investment.
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After going into the Ground Lease Investment Cost, the area calculates 5 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 extremely based on the analysis duration, payment schedule, and reversion value.
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Section 5 - Ground Lease Returns (Unlevered)
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The Ground Lease Returns (Levered) section permits you to determine the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering buying a ground lease and plan to fund the purchase, it is within this section where you can get in the financial obligation presumptions, and see the corresponding return from that levered investment. The area consists of 3 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 design currently just enables for an interest-only loan. +- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due month-to-month or annually.
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After entering the debt presumptions for the ground lease investment, the section determines 5 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 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 model only permits debt with interest-only payments and a balloon at the end of the analysis duration.
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Section 6 - Ground Lease Returns (Levered)
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The last section is where backend inputs utilized in the numerous information recognition lists are found. Unless you plan to modify the design, there is no factor to alter the values in this area.
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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 brief video that walks you through the numerous sections of the model. Note that this video is based upon v1.0 of the design.
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Download the Ground Lease Valuation Model
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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 optimum (your support helps keep the material coming - typical realty evaluation models cost $100 - $300+ per license). Just get in a rate together with an email address to send the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we provide our models on this basis, please connect to either Mike or Spencer.
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We routinely update the model (see version notes). Paid factors to the design 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 values +- Fix to misspelled word on Version tab
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Version 2.32
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- Removed redundant details in E17: G17. +- Updated I22 to reflect more accurate years of term staying. +- Updates to placeholder values
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Version 2.31
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- Further modifications to logic in I59
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Version 2.3
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- Fixed problem where the OFFSET() range 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 resolve for concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!). +- Updates to placeholder worths
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Version 2.1
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- Updates to placeholder worths. +- Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for various 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 'Quick Start Guide' to offer a tutorial for using 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 allow for investor to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to distinguish in between evaluation 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 formatting to better differentiate 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 colleagues for business realty. He has 20+ years of CRE experience and has actually underwritten over $30 billion in real estate throughout top institutional firms.
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