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Buying out lease with key money

Discussion in 'Commercial/Industrial Appraisals' started by CANative, Nov 11, 2011.

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  1. CANative

    CANative Elite Member

    534
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I'm part way through a big job and I'm now analyzing leasing terms, etc.

    One of the credit tenants in this community center had about a year to go on their lease and because the national chain went under they vacated. This was about a month before the date of value I'm working on. They bought out their lease using key money.

    They occupied about 5,000 sf out of 187,000 sf.

    Would this tend to have any effect on the value, positive or negative?

    Ediot: I posted this in the wrong forum. Can someone please move it to the commercial forum?
     
    Last edited: Nov 11, 2011
  2. Matthew Schwartz

    Matthew Schwartz Junior Member

    0
    Feb 22, 2006
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    "One of the credit tenants in this community center had about a year to go on their lease and because the national chain went under they vacated"

    I have no idea what you're talking about!
     
  3. Lee in L.A.

    Lee in L.A. Elite Member

    274
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Vacant space, not good. :shrug:
     
  4. Ken B

    Ken B Elite Member

    187
    Feb 18, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    What benefit or detriment would a potential purchaser realize as a result of the action? What is the present value of future benefits?
     
  5. CANative

    CANative Elite Member

    534
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Key money is kind of like a bribe. So it seems like they bought out the lease with the landlords own money. There was almost a year left on that lease. The property was able to secure another credit tenant but it's taken almost a year for that tenant to get the permits they need to open. In the mean time the property owner has not charged any rent.
     
  6. DTB

    DTB Elite Member

    83
    Jun 11, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    IF I understand the question correctly, you have an effective date of let's say 11/1/2010 and all the lease machinations happened 10/1/2010.

    What does it matter how you got to where you are on 11/1/2010, with 5,000 feet of empty space?

    It is what it is on the effective date, right?
     
  7. CANative

    CANative Elite Member

    534
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    The "effective date" is January 1, 2010. The tenant vacated in October 2009. The lease did not expire until October 2010.

    Another credit tenant vacated in January 2010 and it took until November 2010 to install another tenant (a bank.) This unit was also about 5,000 sf in a stand alone building.

    I'm also studying the NOI/sf trend for this property over the last few years.

    [​IMG]
     
  8. sail143

    sail143 Junior Member

    8
    Oct 6, 2011
    Professional Status:
    Certified General Appraiser
    State:
    Rhode Island
    It seems your thinking and analysis are influenced by information you would not have had if your inspection had been the date of valuation. I don't understand "bought out the lease with the landlords own money". Indicates the landlord did not realize the rent reported. The value of property is based on future income. Your graph indicates income has peaked and likley is in a downward trend. The owner does not appear to be in a strong position.
     
  9. CANative

    CANative Elite Member

    534
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    When I/we interviewed the client last year we questioned him about certain leases (after examining 2009's leasing information.) He stated that "so and so" vacated prior to the term of the lease and bought it out with key money. Key money is sometimes referring to an off the books cash deposit for a unit in which the premises already contains various trade-fixtures, equipment, electric, and plumbing (items typically left when a former tenant vacates), such items have a value above and beyond the typical rent for an empty "vanilla shell" premises. The Landlord would charge the Tenant "Key Money" in order for the Tenant to have the right to use and take over all of the existing equipment.

    That's what I'm trying to figure out. On the one hand the tenant gave something of value to buy out his lease, on the other hand the thing of value was "key money."

    100 basis points on the OAR is a ten million dollar decline in value for this property. Should it be 5.75 (like when it sold in 2005) or 6.75 (as it stands now?) :)

    I'm working as an advocate, not as an appraiser.
     
  10. Howard Klahr

    Howard Klahr Senior Member

    142
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Your valuation for ad valorum pruposes is supposed to be on a fee simple basis. Why would the current leases impact your analysis?
     
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