Ground Lease Valuation Model (Updated Mar 2025).

The subject of ground leases has actually turned up several 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 process of producing an Advanced Concepts Module for our realty monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I believed now would be an excellent time to share my Ground Lease Valuation Model in Excel.

This design can be used standalone, or added to your existing property-level design. In any case, it is handy for both to size a ground lease payment or leasehold owners wanting to comprehend the value of the leasehold (i.e. enhancements) relative to the fee easy interest (i.e. land).

Excel model for assessing a ground lease

What is a Ground Lease and Leasehold Interest?

If you not familiar with the concepts of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:

Ground lease - "A lease structure where a real estate investor leases the land (i.e. ground) just. When it comes to a ground lease, generally one party owns the land (i.e. cost basic interest) while a separate celebration owns the enhancements (i.e. leasehold interest). For the most part, the owner of the land rents the land to the owner of the enhancements for a prolonged time period (20 - 100 years)."

Leasehold Interest - "In property, a leasehold interest refers to a structure where a private or entity (lessee) rents the land (i.e. ground lease) from the fee easy owner (lessor) of the land for a prolonged time period. The lessee of a leasehold estate will usually own the enhancements on the land and use the land and enhancements as if the lessee were the owner of the land. During the regard to 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 needs to return usage of the land, and any enhancements thereon, to the land owner.

Ground leases are typical to prime areas, where landowners do not necessarily wish to sell however where they might not have the know-how (or desire) to run. Thus, they lease the land to someone who owns and operates the enhancements on the land, and get a ground lease payment in return. You see this on a regular basis with office complex in the downtown core of significant cities.

Another case where you'll run into ground leases remain in retail shopping mall. Oftentimes, popular retail occupants prefer to build and own their area however the designer doesn't always want to sell the land. So, the retail tenant will accept lease the ground for 40+ years and build their own building on the leased land. Banks, national restaurants in outparcels, and large department shops are examples of renters that frequently accept this structure.

Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to handle your bespoke modeling project.

How to Use the Ground Lease Valuation Model

All sections of the Ground Lease Valuation Model are consisted of on one worksheet. This is intentional to allow you to insert this model into your own property-level design to make it much easier to include a ground lease element to your analysis.

All analysis is performed on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can see a change log for the model, as well as find crucial links associated with the model.

The Ground Lease worksheet is separated into seven areas as detailed and discussed listed below:

The Residential or commercial property Description area consists of five inputs associated to the financial investment. These inputs are:

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 investment. It prevails in real estate to add the name of the 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 number 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 improvements (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 separate person or entity. So for circumstances, you may be thinking about getting the arrive on which a Target Superstore is constructed. Target owns the building and is renting the land for some prolonged amount of time. The overall rentable location of the structure is the 'Leasehold Net Rentable Area'.

Section 1 - Residential Or Commercial Property Description

The Investment Timing area consists of four needed inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.

Ground Lease Start Date - The month and year when the ground lease started. 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 beginning through ground lease maturity. This is the overall 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 determines the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This generally 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.
Analysis End Date - An optional input, this is by default the Ground Lease End Date. In the occasion you're evaluating a shorter hold duration, merely alter the orange font cell I17 to the favored analysis end date.

Section 2 - Investment Timing

The Ground Lease Terms area includes business regards to the ground lease, including payment quantity, frequency, and lease boosts. This area includes five inputs plus the choice to manually model the lease payment quantities.

Initial Payment Amount - The amount of the very first lease payment. Depending on the payment frequency input (see below), this amount might be for a yearly or monthly payment.
Lease Increase Method - The approach utilized to design lease boosts. 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 model the lease payment quantities by year. If Custom is selected, the yearly rent payment amounts in row 26 become inputs for you to by hand change (i.e. font style turns blue). Important Note: If you pick Custom and begin to alter the yearly lease payment amounts in row 26, there is no way to revert back to another Lease Increase Method.

Section 3 - Ground Lease Terms

It is within the Valuation (Fee and Leasehold) area where you determine the reversion value of the land (i.e. ground lease), today value of the land (i.e. ground lease), and the imputed worth of the leasehold interest. This section is separated into three subsections, with 5 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 simply put, a typical direct cap appraisal of a realty financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income obtained from renting 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 included. The concept being to reach a worth 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 cost (i.e. before inflation). Retenanting might include simple leasing costs, it may include renovation and leasing, or it might include taking down the structure and restoring something new. The idea is to arrive at a 'Net Reversion Value (Nominal)' after representing the expense to retenant.
Reversion Growth Rate (Per Year) - All of the above calculations are done before accounting for inflation (i.e. development). Enter a development rate here, and the 'Net Reversion Value (Nominal)' will be grown to arrive at 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 calculation. It is computed by taking the residential or commercial property value web of any retenanting expenses, and then growing it by a development rate. The value is an optional input in the occasion you want to personalize the reversion worth.

Discount Rate - The discount rate at which to determine today worth of the ground lease cash flows. Think about this discount rate as a hurdle rate (i.e. required rate of return) for a ground lease financial investment.

Section 4 - Valuation (Fee and Leasehold)

The Ground Lease Returns (Unlevered) section allows you to determine 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 area where you can enter your acquisition/investment cost, and see the matching returns from that investment. The section consists of simply one input.

Ground Lease Investment Cost - This is the cost to get land with a ground lease. It needs to consist of the acquisition expense, together with any other due diligence, closing, and pursuit expenses connected to the financial investment.

After going into the Ground Lease Investment Cost, the section computes 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 highly based on the analysis period, payment schedule, and reversion value.

Section 5 - Ground Lease Returns (Unlevered)

The Ground Lease Returns (Levered) area enables you to compute the levered (i.e. with debt) returns of a ground lease investment. If you are considering purchasing a ground lease and intend 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 three inputs.

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

After getting in the financial obligation assumptions for the ground lease financial investment, the section computes five 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 based on the analysis period, payment schedule, and reversion value. The amount and rate of the debt will also greatly drive the levered return. And as a reminder, for now the model only permits financial obligation with interest-only payments and a balloon at the end of the analysis period.

Section 6 - Ground Lease Returns (Levered)

The final area is where backend inputs used in the different data validation lists are discovered. Unless you intend to modify the design, there is no reason to alter the worths in this area.

Section 7 - Data Validation

Video Walkthrough - Using the Ground Lease Valuation Model

In addition to the composed assistance above, I've put together a brief video that walks you through the various sections of the design. Note that this video is based on v1.0 of the model.

Download the Ground Lease Valuation Model

To make this model accessible to everybody, it is provided on a "Pay What You're Able" basis with no minimum (go into $0 if you 'd like) or optimum (your assistance helps keep the material coming - normal property valuation designs cost $100 - $300+ per license). Just go into a price together with an email address to send 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.

We regularly update the model (see variation notes). Paid factors to the model get a brand-new download link via e-mail each time the design is upgraded.

Version Notes

Version 2.33

- Rewrote 'Quick Start Guide' with updates and for enhanced readability
- Updates to placeholder worths
- Fix to misspelled word on Version tab

Version 2.32

- Removed redundant details in E17: G17.
- Updated I22 to reflect more accurate years of term staying.
- Updates to placeholder values

Version 2.31

- Further modifications to reasoning in I59

Version 2.3

- Fixed concern 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 fix for problem when payment is Monthly and not % Inc (thanks to Accelerator member JS for the fix!).
- Updates to placeholder values

Version 2.1

- Updates to placeholder worths.
- Added extra notes under 'Quick Start Guide' to clarify typical 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 offer a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for clarification purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' presumption to enable for financier to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to separate 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 much better distinguish in between Valuations sections and Investment Returns areas.
- Adjusted return solutions to make vibrant 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 financed over $30 billion in realty across leading institutional companies.