Ground lease DCF-based
Discount the contractual ground-rent stream and its terminal value, then deduct land value from fee-simple property value.
Property value − PV(ground rent)
One leasehold interest, four valuation paths
The first two models value the land interest and deduct it from fee-simple property value. The other two value the residual building NOI directly.
Ground lease cap rate-based
Capitalize Year 1 ground rent at a land-interest cap rate and deduct the result from fee-simple property value.
Property value − ground rent ÷ land cap rate
Building NOI DCF-based
Forecast property NOI less ground rent, then discount the riskier residual stream and its terminal value.
PV(property NOI − ground rent)
Building NOI cap rate-based
Capitalize Year 1 building NOI directly using a cap rate that reflects the residual building interest.
(Property NOI − ground rent) ÷ building cap rate
Required returns should generally reflect the risk order: ground-lease NOI < fee-simple property NOI < residual building NOI.
Change the assumptions
Move a slider or enter a value. The four valuations, component bridge, comparison bars, and cash-flow paths update immediately.
Property and lease
Common inputs establish fee-simple value and the contractual rent schedule.
Land-interest pricing
Models 1 and 2 price the comparatively secure ground-rent stream.
DCF-implied guide: 6.97% = 7.30% − 0.33% equivalent annual rent growth.
Building-interest pricing
Models 3 and 4 price the residual building NOI after rent is paid.
1 · Ground lease DCF$57.52M$42.48M land value deducted
2 · Ground lease cap rate$57.14M$42.86M land value deducted
3 · Building NOI DCF$57.75MPV of residual building cash flows
4 · Building NOI cap rate$57.14M$5.00M Year 1 building NOI
Building value comparison
The longest bar is the highest current estimate. Comparable estimates require internally consistent risk and growth assumptions.
The four estimates span $0.61M, or 1.1% of their average. They are tightly clustered in the Chapter 17 example.
Calculation bridge
All amounts are in millions of dollars. Parentheses indicate a deduction from fee-simple value.
| Calculation | Model 1 | Model 2 | Model 3 | Model 4 |
|---|---|---|---|---|
| Fee-simple property value | $100.00 | $100.00 | — | — |
| Land value deduction | ($42.48) | ($42.86) | — | — |
| PV / capitalized building NOI | — | — | $57.75 | $57.14 |
| Building value | $57.52 | $57.14 | $57.75 | $57.14 |
Property, ground-lease, and residual building NOIYears 1–30
Property NOIGround rentBuilding NOI
The ground rent steps up every 10 years while property NOI grows annually; building NOI is the residual after the rent payment.
How to interpret divergence
The models are cross-checks, not four independent facts. Large gaps usually reveal inconsistent assumptions about growth, risk, or terminal pricing.
Separate the interestsFee-simple value combines land and building. A ground lease divides the cash flows and risk between landowner and building owner.
Match risk to cash flowThe secure contractual rent normally supports a lower required return than the residual building NOI, which absorbs operating volatility after rent is paid.
Reconcile DCF and cap ratesA direct cap rate should be consistent with the discount rate and sustainable growth embedded in the corresponding DCF.
Classroom simplification. The starting inputs reproduce the Chapter 17 Seaview Apartments spreadsheet calculations, subject to display rounding. Rent increases occur in Years 10, 20, and 30, as in the workbook. The model assumes annual end-of-year cash flows and terminal values based on final projected-year cash flow; it omits taxes, transaction costs, financing, lease reversion, default, renewal options, and other legal provisions. This is an instructional illustration, not an appraisal.