Ground Lease Valuation Model Updated Mar 2025 .
The subject of ground leases has come up a number of times in the past few weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I remain in the procedure of developing an Advanced Concepts Module for our real estate monetary modeling Accelerator program covering the of modeling ground leases. So I thought now would be a great time to share my Ground Lease Valuation Model in Excel.
This design can be used standalone, or included to your existing property-level design. In either case, it is valuable for both landowners aiming to size a ground lease payment or leasehold owners wanting to understand the worth of the leasehold (i.e. improvements) relative to the charge basic interest (i.e. land).
Excel design for examining a ground lease
What is a Ground Lease and Leasehold Interest?
If you not familiar with the principles of Ground Lease and Leasehold Interest, I'll refer you to the definitions in our Glossary of CRE Terms:
Ground lease - "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. cost basic 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 improvements for a prolonged time period (20 - 100 years)."
Leasehold Interest - "In genuine estate, a leasehold interest refers to a structure where a private or entity (lessee) leases the land (i.e. ground lease) from the cost easy owner (lessor) of the land for a prolonged amount of time. The lessee of a leasehold estate will typically own the enhancements 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 usage of the land. At the end of the ground lease term, the lessee must return usage of the land, and any improvements thereon, to the land owner.
Ground leases prevail to prime locations, where landowners don't necessarily desire to sell but where they may not have the expertise (or desire) to operate. Thus, they rent the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this frequently with office structures in the downtown core of significant cities.
Another case where you'll encounter ground leases remain in retail shopping mall. Oftentimes, popular retail tenants prefer to build and own their area however the developer does not always wish to sell the land. So, the retail tenant will consent to lease the ground for 40+ years and develop their own structure on the leased land. Banks, nationwide restaurants in outparcels, and big department stores are examples of renters that typically agree to this structure.
Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling job.
How to Use the Ground Lease Valuation Model
All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is deliberate to enable you to place this design into your own property-level model to make it easier to include a ground lease component to your analysis.
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, in addition to discover important links associated with the model.
The Ground Lease worksheet is broken up into seven areas as laid out and described listed below:
The Residential or commercial property Description section consists of five inputs associated to the investment. These inputs are:
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 financial investment. It is typical in realty to append the name of the financial 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 variety of acres or hectares will than immediately be calculated 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 presumed to be owned by one person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate individual or entity. So for instance, you might be thinking about getting the arrive on which a Target Superstore is developed. Target owns the building and is leasing the land for some prolonged amount of time. The overall rentable area of the building is the 'Leasehold Net Rentable Area'.
Section 1 - Residential Or Commercial Property Description
The Investment Timing section consists of four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and financial investment.
Ground Lease Start Date - The month and year when the ground lease began. 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 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 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 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 the event you're examining a much shorter hold period, merely change the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms section includes the business terms of the ground lease, consisting of payment amount, frequency, and lease increases. This area consists of 5 inputs plus the option to manually design the rent payment quantities.
Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see listed below), this amount might be for a yearly or monthly payment.
Lease Increase Method - The technique utilized to design rent increases. This can either be: None - No rent increases.
% Inc. - A portion boost over the previous lease quantity.
$ Inc. - A quantity increase over the previous rent quantity.
Custom - Manually design the lease payment amounts by year. If Custom is selected, the annual rent payment amounts in row 26 end up being inputs for you to manually alter (i.e. font turns blue). Important Note: If you pick Custom and start to alter the annual rent payment amounts in row 26, there is no other way to revert back to another Lease Increase Method.
Section 3 - Ground Lease Terms
It is within the Valuation (Fee and Leasehold) section where you determine the reversion worth of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This area is broken up into three subsections, with five inputs and one optional input throughout the 3 subsections.
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 in other words, a normal direct cap appraisal of a real estate financial investment. Inputs consist of: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from leasing the improvements, unique 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 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 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 costs, it may include restoration and leasing, or it may include taking apart the structure 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 estimations 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)' utilized as the reversion value in the ground lease present value estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion value used in the ground lease present value estimation. It is determined by taking the residential or commercial property value internet of any retenanting expenses, and after that growing it by a development rate. The value is an optional input in the event you desire to tailor the reversion value.
Discount Rate - The discount rate at which to calculate today worth of the ground lease capital. Consider this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease investment.
Section 4 - Valuation (Fee and Leasehold)
The Ground Lease Returns (Unlevered) section permits you to determine the unlevered (i.e. before debt) returns of a ground lease investment. If you are considering buying a ground lease, it is within this area where you can enter your acquisition/investment expense, and see the matching returns from that investment. The area consists of just one input.
Ground Lease Investment Cost - This is the cost to acquire land with a ground lease. It ought to include the acquisition expense, together with any other due diligence, closing, and pursuit expenses related to the investment.
After entering the Ground Lease Investment Cost, the section calculates 5 return metrics:
- Unlevered Internal Rate of Return
- Unlevered Equity Multiple
- Net Profit
Average Rate of Return
- Average Free-and-Clear Return
Note that the resulting returns are extremely reliant on the analysis period, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) section enables you to calculate the levered (i.e. with debt) returns of a ground lease financial investment. If you are thinking about buying a ground lease and plan to fund the purchase, it is within this section where you can go into the financial obligation assumptions, and see the matching return from that levered investment. The section consists of three inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will compute the loan amount.
- Annual Rate Of Interest - The yearly rate to be paid on the mortgage. Note that the model currently just enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or annually.
After entering the debt assumptions for the ground lease investment, the area determines 5 return metrics:
- - Levered Internal Rate of Return
- Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return
Similar to the unlevered analysis, the resulting returns are extremely reliant on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will also heavily drive the levered return. And as a tip, for now the design just permits debt with interest-only payments and a balloon at the end of the analysis duration.
Section 6 - Ground Lease Returns (Levered)
The last section is where backend inputs utilized in the various information recognition lists are discovered. Unless you mean to modify the model, there is no reason to alter the values in this area.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written assistance above, I have actually put together a brief video that walks you through the various areas of the design. Note that this video is based upon v1.0 of the model.
Download the Ground Lease Valuation Model
To make this model available to everybody, it is provided on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your assistance assists keep the content coming - common property assessment models offer for $100 - $300+ per license). Just go into a price together with an e-mail address to send the download link to, and after that click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our models on this basis, please reach out to either Mike or Spencer.
We routinely upgrade the design (see version notes). Paid factors to the design receive a brand-new download link by means of email each time the design is upgraded.
Version Notes
Version 2.33
- Rewrote 'Quick Start Guide' with updates and for enhanced readability
- Updates to placeholder values
- Fix to misspelled word on Version tab
Version 2.32
- Removed redundant information in E17: G17.
- Updated I22 to reflect more precise years of term remaining.
- Updates to placeholder worths
Version 2.31
- Further modifications to reasoning in I59
Version 2.3
- Fixed issue where the OFFSET() range in the optional formula for 'Reversion Value' (I59) was missing the last cell
Version 2.2
- 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 worths
Version 2.1
- Updates to placeholder worths.
- Added additional notes under 'Flying start Guide' to clarify typical confusion around start dates for various sections.
- Misc. formatting updates
Version 2.0
- 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 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' assumption to permit investor to analyze returns on an Analysis Period much 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 format to much better separate between Valuations sections and Investment Returns areas.
- Adjusted return formulas to make dynamic to Investment Hold Period
Version 1.0
- Initial release
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 underwritten over $30 billion in realty throughout top institutional firms.