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Negative Leasehold.what to do?

Discussion in 'Commercial/Industrial Appraisals' started by CMoneyVT, Jul 29, 2009.

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  1. CMoneyVT

    CMoneyVT New Member

    0
    Jul 17, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Virginia
    I'm appraising a proposed retail strip center (approx. 15,000 SF), of which 11,000 SF is going to be occupied by a strong regional tenant. This tenant has signed a 10-year lease at a rate of $18.00/SF, triple net, with $1.65/SF in CAM. The asking rates for the adjacent retail spaces (1,100 SF) are $16.50/SF, which is typical for this market. After various conversations with local leasing agents, they indicated that in this situation they would most likely negotiate a $14 - $16/SF rental rate with a tenant this large.

    On page 455 of the 13th Edition, it says you can capitalize or discount the lease premium or "excess rent" at a higher rate seperately. Has anyone ever done this before or have any input on the practicality of using two different capitalization rates. Or if you have any other suggestions on how to account for the risk associated with a negative leasehold.

    A co-worker suggested just providing the bank with a fee simple value for the cost, income, and sales, and then a seperate leased fee value based on the contract rent and concluding that the lease is above market; letting the bank make their own decision.

    Thanks,

    Cody
     
  2. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    27
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    If the tenant is strong there may be no need to treat the income differently.

    Value the property at market rent and add the present value of the above market rent to arrive at your leased fee value. Same amount can be applied to the sales comparison and cost approaches.

    Straightforward assignment. The key is to assess the risk inherent in receiving the above market rent. With a strong regional tenant, the risk is reduced.
     
  3. Vernon Martin

    Vernon Martin Senior Member

    2
    Jun 8, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    Or in other words, the premium above market rent should be discounted rather than capitalized.

    You might also want to look at the credit ratings from the rating agencies to judge how viable the premium rental income will be. There is a big difference in risk between a lease to Walgreen's and a lease to RiteAid, for instance.
     
  4. CMoneyVT

    CMoneyVT New Member

    0
    Jul 17, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Virginia
     
  5. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    27
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    You would add that value (present value of the above market rent--discounted as Mr. Martin indicates), as that value represents the difference between the fee simple value and the leased fee value (i.e. increased value resulting from an above market rent). The cost and/or sales comparison approach will yield a fee simple value (depending on the nature of the income stream available with the comparable sales); the increase results in a leased fee value by the cost/sales comparison approach.

    You are valuing a specified property interest--i.e. leased fee. All three approaches to value should reflect this fact.

    You are "mis-remembering" or misconstruing something you heard in a class.
     
  6. Y-TOWN

    Y-TOWN Junior Member

    0
    Mar 10, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Ohio
     
  7. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    27
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Is there any value at all in Youngstown--isn't everyone/everything other than YSU heading for the exits?

    Sorry--couldn't resist!
     
  8. Vernon Martin

    Vernon Martin Senior Member

    2
    Jun 8, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    A lot of federal leases are written that way, which is something to be concerned about.

    I have also seen some appraisers have the misguided notion that a 25-year-old office building full of government tenants has a stable occupancy despite being near new, vacant office buildings. They have said things like, "A government tenant would never relocate to a nice, new office building like that." Back in the late 80s, though, there were plenty of government agencies moving into new space at rents as low as $9 psf full service gross without any shame or questions from OIGs or Congressmen. I worked at one.
     
  9. Y-TOWN

    Y-TOWN Junior Member

    0
    Mar 10, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Ohio
    Actually the 10,000 S/F to 25,000 S/F smaller new industrial building market is holding up well. I'm assuming some new construction in the next year in that market. Small medical is great. Retail is flat, apartments are good. Could be worse :)
     
  10. Y-TOWN

    Y-TOWN Junior Member

    0
    Mar 10, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Ohio
    I've seen the same - what is even better is I had an appraiser call me and want to know what a full service lease was
     
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