How would you value a commercial property that is on leased land and has 30 years left on the lease.

Non of the tenants are national franchises, and the structure requires some upgrades and attention to deferred maintenance.
In Selling Property - Asked by Mark V. - Jan 9, 2011
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Answer(s)

Steve C.
Broker/Agent
Lake Helen, FL

I would divide the NOI by CAP rates for similar properties and then make a negative adjustment to the price for the costs of updating the property and deferred maintenance. I would only worry about ground lease properties if the lease terms is set to expire in the next seven years.

Jan 10, 2011
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Chris F.
Broker/Agent
Salem, OR

If they are not national tenants, it gets down to tenant strenght, terms and all those other fun risk analysis questions.
Who is responsible for structure upkeep?
Are you selling the land lease itself, or are you helping to sell the leased building, not the land?
Feel free to email me and I would be happy to assist

Jan 10, 2011
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David A.
Broker/Agent
Atlanta, GA

If I'm understanding you correctly, the 30 years remain on the land lease...not the tenants' leases. If this is the case, then the owner of this structure loses the right to collect rents in 30 years and using a traditional cap rate valuation model would exaggerate the value.
I think a more appropriate tool to evaluate the yield on this investment would be the discounted cash flow model. Consider that your NOI, in addition to providing the yield on your capital, must recover within the 30 year term:
1. Capital invested to purchase the asset.
2. Any CAPEX for improvements, deferred maintenance, etc. invested into the asset during your holding period.
You need to quite careful with a deal like this. Consider what happens in year 25 when the building needs a new roof. If you pay to install it, you may never recover most of that capital. If you don't pay to install it, you may lose your tenants or find yourself in a legal dispute with the land owner (depending on your obligations under the lease).

Jan 10, 2011
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Rob B.
Chandler, AZ

Mark....
Steve C. gave you a helpful answer. I believe that you must also add an additional pop to the cap rate for the property based on the length of the lease, the type of property, the quality of tenants and the urgency of a sale. The longer the lease the smaller the additional cap rate amount to be added. There are also strong factors having to do with the more limited market for buyers of improvements on leased properties. The expanse of the market is reduced by those who ask themselves the question: "Who will my buyer be when I need to sell the property". The answer to this is that ground leased properties do not have as many potential buyers. Consequently, the dynamics of the economics in the free market take place. Less demand, the lower price for a property. A 30 year lease is good. But, the quality of the borrower is also a huge factor.
Good luck Mark..... Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: rob@capratecommercial.com

Jan 11, 2011
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