Ground Lease Valuation Model (Updated Mar 2025).

The subject of ground leases has turned up a number of times in the past couple of weeks. Numerous A.CRE readers have emailed to ask for a purpose-built Ground Lease Valuation Model. And I'm in the process of developing an Advanced Concepts Module for our property monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be a great time to share my Valuation Model in Excel.

This model can be used standalone, or contributed to your existing property-level model. Either method, it is valuable for both landowners seeking to size a ground lease payment or leasehold owners aiming to comprehend the worth of the leasehold (i.e. enhancements) relative to the cost easy interest (i.e. land).

Excel model for evaluating a ground lease

What is a Ground Lease and Leasehold Interest?

If you unfamiliar with the concepts 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 a real estate financier rents the land (i.e. ground) just. In the case of a ground lease, normally one party owns the land (i.e. charge simple interest) while a different celebration owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land leases the land to the owner of the enhancements for an extended time period (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest describes a structure where a specific or entity (lessee) rents 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 generally own the enhancements on the land and use 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 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.

Ground leases prevail to prime places, where landowners don't necessarily desire to sell however where they might not have the knowledge (or desire) to run. Thus, they rent the land to somebody who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this rather often with office complex in the downtown core of major cities.

Another case where you'll face ground leases remain in retail shopping centers. Oftentimes, popular retail tenants prefer to construct and own their area however the designer doesn't necessarily wish to offer the land. So, the retail tenant will consent to lease the ground for 40+ years and develop their own building on the leased land. Banks, national restaurants in outparcels, and large outlet store are examples of occupants that typically accept this structure.

Quick Note: Not thinking about DIY analysis? Consider dealing with A.CRE Consulting to manage your bespoke modeling task.

How to Use the Ground Lease Valuation Model

All areas of the Ground Lease Valuation Model are included on one worksheet. This is deliberate to enable you to place this design into your own property-level design to make it easier to add a ground lease part to your analysis.

All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is also included where you can see a modification log for the model, as well as discover crucial links connected to the model.

The Ground Lease worksheet is separated into 7 areas as outlined and described below:

The Residential or commercial property Description section consists of 5 inputs related to the financial investment. These inputs are:

SF/M2 - In cell I3 enter whether the step 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 genuine estate to append the name of the investment with (Ground Lease) to signify 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 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 presumed to be owned by one person or entity, and the leasehold interest (i.e. improvements) to be owned by a separate person or entity. So for example, you might be thinking about acquiring the arrive on which a Target Superstore is developed. Target owns the structure and is renting the land for some prolonged amount of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area includes four required inputs and one optional inputs. These inputs relate to the chronology of the ground lease and investment.

Ground Lease Start Date - The month and year when the ground lease began. This ought to 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 start through ground lease maturity. This is the total length of the ground lease, not the number of years staying. The optimum length is 100 years. Based on the ground lease length, the model then computes 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 constructed to permit analysis to begin 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 analyzing a much shorter hold duration, simply alter the orange font cell I17 to the preferred analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms section contains business terms of the ground lease, including payment amount, frequency, and lease boosts. This area includes five inputs plus the alternative to by hand design the rent payment amounts.

Initial Payment Amount - The quantity of the very first lease payment. Depending upon the payment frequency input (see below), this amount may be for an annual or regular monthly payment. Lease Increase Method - The technique utilized to design rent boosts. This can either be: None - No lease boosts. % Inc. - A percentage increase over the previous rent quantity. $ Inc. - An amount increase over the previous rent amount. Custom - Manually design the rent payment quantities by year. If Custom is selected, the yearly lease payment quantities in row 26 become inputs for you to by hand change (i.e. font style turns blue). Important Note: If you pick Custom and start to change the yearly lease payment amounts in row 26, there is no method to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) area where you calculate the reversion worth of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is separated into three subsections, with 5 inputs and one optional input throughout the three subsections.

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 simply put, a typical direct cap evaluation of a property investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the annual net operating income stemmed 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 consisted of. 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 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 might consist of simple leasing expenses, it might consist of restoration and leasing, or it might consist of tearing down the building and rebuilding something brand-new. The idea is to get to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant. Reversion Growth Rate (Per Year) - All of the above estimations are done before representing inflation (i.e. development). 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 worth in the ground lease present worth estimation. Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth utilized in the ground lease present worth computation. It is calculated by taking the residential or commercial property value web of any retenanting costs, and after that growing it by a development rate. The worth is an optional input in case you wish to tailor the reversion value.

Discount Rate - The discount rate at which to compute today worth of the ground lease capital. Think of this discount rate as a hurdle rate (i.e. necessary rate of return) for a ground lease investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section allows you to compute the unlevered (i.e. before debt) returns of a ground lease 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 corresponding returns from that investment. The section includes just one input.

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 expenses connected to the financial investment.

After entering the Ground Lease Investment Cost, the area calculates five 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 duration, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) section enables you to compute the levered (i.e. with financial obligation) returns of a ground lease financial investment. If you are considering purchasing a ground lease and mean to fund the purchase, it is within this area where you can get in the debt presumptions, and see the corresponding return from that levered investment. The section includes 3 inputs.

Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan quantity. - Annual Interest Rate - The annual rate to be paid on the mortgage. Note that the model presently just permits for an interest-only loan. - Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or yearly.

After getting in the financial obligation assumptions for the ground lease investment, the area computes 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 highly based on the analysis period, payment schedule, and reversion worth. The quantity and rate of the financial obligation will likewise heavily drive the levered return. And as a suggestion, in the meantime the design just permits for debt with interest-only payments and a balloon at the end of the analysis period.

Section 6 - Ground Lease Returns (Levered)

The last area is where backend inputs used in the different information validation lists are discovered. Unless you mean to customize the model, there is no reason to change the values in this section.

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 short video that walks you through the numerous sections of the design. Note that this video is based upon v1.0 of the model.

Download the Ground Lease Valuation Model

To make this design accessible to everyone, it is offered on a "Pay What You're Able" basis without any minimum (go into $0 if you 'd like) or optimum (your assistance assists keep the material coming - typical property valuation designs cost $100 - $300+ per license). Just get in a cost 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 designs on this basis, please reach out to either Mike or Spencer.

We frequently update the model (see version notes). Paid factors to the model get a new download link through e-mail each time the design is upgraded.

Version Notes

Version 2.33

- Rewrote 'Flying 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 accurate years of term remaining. - Updates to placeholder values

Version 2.31

- Further modifications to reasoning in I59

Version 2.3

- Fixed problem where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing the last cell

Version 2.2

- Revised formula in M26: DG26 to resolve for concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!). - Updates to placeholder worths

Version 2.1

- Updates to placeholder values. - Added additional notes under 'Flying start Guide' to clarify common confusion around start dates for various areas. - Misc. formatting updates

Version 2.0

- Moved 'Analysis Start', 'Analysis Period', and 'Analysis End' inputs above Ground Lease dates for improved user experience. - Added a 'Quick Start Guide' to supply a tutorial for using the design. - Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation functions. - Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'. - Added 'Investment Term' presumption to enable for financier to examine returns on an Analysis Period much shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between assessment 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 format to much better separate in between Valuations sections and Investment Returns areas. - Adjusted return formulas to make vibrant to Investment Hold Period

Version 1.0
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- Initial release

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