Ground Lease Economics Model

The ground lease model focuses on contractual ground rent as the core revenue source. Base rent is usually derived from an initial yield on land value; the template sets it as land value multiplied by an initial rent yield.

• Rent then escalates annually, often at a fixed rate for simplicity. The lessor bears very limited costs because the tenant handles property-level expenses under a triple-net structure.
• Lessor-level operating expenses, such as legal, insurance, and administration, are small relative to rent, typically a low single-digit percentage. Because of this, net operating income stays close to gross rent, with the margin compressing only slightly over time if operating costs inflate faster than rent.

Loan sizing is a critical calculation flow. The model determines the loan amount as the minimum of an LTV-based cap and a DSCR-based cap.

• The DSCR cap is the Year 1 net operating income divided by the product of a target DSCR and an annual debt constant. That constant is the payment per dollar of loan principal at a given interest rate and amortisation term.
• Once sized, the debt schedule uses a standard level-payment mortgage: interest is the opening balance times the rate, principal is the payment minus interest, and the closing balance reduces accordingly. The model checks DSCR each year and confirms the balance declines.

This flow matters because lower-yield ground leases often hit the DSCR limit before the LTV limit, directly affecting how much debt the asset can support.

The model produces several outputs for evaluating the investment. Levered IRR, MOIC, cash-on-cash return, and minimum DSCR are the main return metrics.

• Cash-on-cash return is defined as free cash flow to equity divided by initial equity. The exit value is calculated by capitalising forward net operating income, typically Year 11, at an exit cap rate that is usually modestly wider than the entry cap rate to reflect a shorter remaining lease term.
• Selling costs are deducted, and the outstanding loan balloon is repaid before net disposition proceeds are calculated. These proceeds then flow into the equity cash flow array for the IRR calculation.

The model uses a bare IRR formula so errors are visible rather than hidden, which helps maintain model integrity.

This ground lease model helps a landowner assess whether a proposed lease generates adequate risk-adjusted returns. It can test how different rent escalation rates, entry yields, LTV assumptions, target DSCR levels, and exit caps affect levered returns.

• Because the DSCR constraint often limits debt capacity at lower yields, the model highlights the trade-off between leverage and covenant compliance. It also clarifies the impact of transaction and selling costs, balloon repayment, and operating cost inflation on equity returns.
• The structure is designed for a single-asset SPV with non-recourse debt. Users can compare base case outputs to target IRR, MOIC, and cash-on-cash hurdles, and the validation checks flag common errors such as DSCR breaches or balloon shortfalls.