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The subject of ground leases has actually shown up several times in the past few weeks. Numerous A.CRE readers have emailed to [request](https://my.bilik4u.com) for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of creating an Advanced Concepts Module for our property financial modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be a great time to share my [Ground Lease](https://homesgofast.com) [Valuation Model](https://grundstein-kapital.com) in Excel.
[myrtlebeach.cc](http://www.myrtlebeach.cc/) +
This design can be used standalone, or [included](https://livein.gy) to your existing property-level model. In any case, it is practical for both landowners looking to size a ground lease [payment](https://utahoffice.space) or leasehold owners seeking to comprehend the value of the leasehold (i.e. enhancements) [relative](https://bmasurveys.com) to the [fee basic](https://ivoryafrica.com) interest (i.e. land).
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Excel model for a ground lease
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What is a Ground Lease and Leasehold Interest?
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If you [unknown](https://csirealestateinternational.com) with the [principles](https://bmasurveys.com) of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:
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[Ground lease](https://acresproperty.in) - "A lease structure where an investor leases the land (i.e. ground) only. In the case of a ground lease, generally one party owns the land (i.e. fee basic 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 improvements for an extended amount of time (20 - 100 years)."
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[Leasehold](https://thad.qlogictechnologies.com) Interest - "In property, a leasehold interest describes a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the charge easy owner (lessor) of the land for an extended time period. 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 term of 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 improvements thereon, to the land owner.
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Ground leases prevail to prime places, where landowners don't always wish to offer but where they might not have the proficiency (or desire) to run. Thus, they rent the land to somebody who owns and operates the improvements on the land, and receive a ground lease payment in return. You see this quite often with workplace 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 mall. Oftentimes, prominent retail occupants choose to construct and own their area however the designer does not always wish to sell the land. So, the retail renter will concur to rent the ground for 40+ years and construct their own building on the rented land. Banks, nationwide dining establishments in outparcels, and large outlet store are examples of occupants that typically consent to this structure.
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Quick Note: Not interested in DIY analysis? Consider working 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 areas of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to permit you to insert this design into your own property-level design to make it much easier to include 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 also included where you can view a modification log for the model, as well as discover crucial links related to the model.
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The Ground Lease worksheet is broken up into seven sections as outlined and discussed below:
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The Residential or commercial property Description area consists of five inputs related to the financial investment. These inputs are:
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SF/M2 - In cell I3 enter whether the procedure of size is in square feet (SF) or square meters (M2). +Residential or commercial property Name - Name of the investment. It prevails in property to add the name of the financial investment with (Ground Lease) to signify that the investment is for the cost easy 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 variety of acres or hectares will than immediately be determined in cell E6. +Leasehold Net Rentable Area - Total net rentable area 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. improvements) to be owned by a separate person or entity. So for circumstances, you might be thinking about acquiring the land on which a Target Superstore is built. Target owns the structure and is renting the land for some extended time period. The overall rentable location of the building 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 relate to the chronology of the ground lease and financial investment.
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Ground Lease Start Date - The month and year when the ground lease commenced. This must 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 number of years staying. The maximum length is 100 years. Based upon 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 begin. This typically is equivalent to the Next Ground Lease Payment date, although the design 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 case you're examining a shorter hold period, just alter 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 includes the service terms of the ground lease, consisting of payment amount, frequency, and rent increases. This section consists of five inputs plus the choice to manually model the lease payment amounts.
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Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this quantity may be for a yearly or month-to-month payment. +Lease Increase Method - The method utilized to model lease boosts. This can either be: None - No lease boosts. +% Inc. - A portion increase over the previous rent quantity. +$ Inc. - A quantity boost over the previous rent quantity. +Custom - Manually design the rent payment amounts by year. If Custom is chosen, the annual lease payment amounts in row 26 end up being inputs for you to by hand alter (i.e. typeface turns blue). Important Note: If you choose Custom and begin to change the yearly lease payment amounts 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 calculate the reversion worth 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 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 value of the residential or commercial property as if there was no ground lease. Or to put it simply, a normal direct cap valuation of a property financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained from renting 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 included. The idea being to reach 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 may include easy leasing expenses, it might include renovation and leasing, or it might include taking down the structure and rebuilding something new. The idea is to get to a 'Net Reversion Value (Nominal)' after representing the cost to retenant. +Reversion Growth Rate (Annually) - All of the above estimations are done before representing 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 value calculation. +Reversion Value (Adjusted for Growth) - Optional Input. The reversion value utilized in the ground lease present worth estimation. It is determined by taking the residential or commercial property value net of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in case you wish to personalize the reversion value.
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Discount Rate - The discount rate at which to determine today worth of the ground lease cash circulations. Think of this discount rate as a hurdle rate (i.e. required 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 purchasing a ground lease, it is within this section where you can enter your acquisition/investment expense, and see the matching returns from that investment. The area consists of just one input.
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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 associated with the financial investment.
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After getting in 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 reliant on the analysis period, 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 allows you to compute the levered (i.e. with debt) returns of a ground lease financial investment. If you are considering buying a ground lease and mean to fund the purchase, it is within this section where you can get in the debt assumptions, and see the matching return from that levered financial investment. The area 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 calculate the loan amount. +- Annual Rates Of Interest - The yearly rate to be paid on the mortgage. Note that the design currently only permits an interest-only loan. +- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due regular monthly or yearly.
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After entering the debt assumptions for the ground lease investment, the section calculates 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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As with the unlevered analysis, the resulting returns are highly reliant on the analysis duration, payment schedule, and reversion value. The amount and rate of the financial obligation will likewise heavily drive the levered return. And as a tip, in the meantime the design just permits for financial obligation 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 final area is where backend inputs used 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 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 guidance above, I have actually 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.
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Download the Ground Lease Valuation Model
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To make this model accessible to everybody, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you 'd like) or optimum (your assistance assists keep the content coming - typical realty appraisal designs cost $100 - $300+ per license). Just enter a price 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 provide our models on this basis, please connect to either Mike or Spencer.
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We frequently upgrade the design (see version notes). Paid contributors to the design get a new download link through email each time the model is upgraded.
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Version Notes
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Version 2.33
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- Rewrote 'Flying 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 staying. +- Updates to placeholder values
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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 issue where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing 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 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 supply a tutorial for utilizing the model. +- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for information purposes. +- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'. +- Added 'Investment Term' presumption to enable for investor to evaluate returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate in 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 formatting to much better separate in between Valuations areas and Investment Returns areas. +- Adjusted return formulas to make vibrant to Investment Hold Period
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Version 1.0
[billdietrich.me](https://www.billdietrich.me/Magnolia.html) +
- 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 commercial real estate. He has 20+ years of CRE experience and has financed over $30 billion in realty across top institutional firms.
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