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reconcile leased fee vs fee simple in franchise tenant

Discussion in 'Commercial/Industrial Appraisals' started by john snyder, Dec 28, 2011.

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  1. john snyder

    john snyder Senior Member

    0
    Jul 27, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Michigan
    Problem: reconcile difference between leased fee and fee simple

    tenant is sgl user franchise 5k to 10k square feet, retail at a rate much higher then local ma and pa would pay for the area.

    Lease is NNN 5 year with two 5 year options left

    Fee simple - present market shows those similar buildings that are offered on market in this area (pop is about 20k in this ag comunity) have long term exposure to market at reduced rates since no longer affiliated with franchise.

    Large difference between leased fee and fee simple
     
  2. ETex2

    ETex2 Sophomore Member

    0
    Dec 10, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Texas
    Why would you want to reconcile the difference between the two if it is owned in leased fee? Despite the fact that there are two five year options, the reversion should probably be based on market rents at the end of the current term.
     
  3. john snyder

    john snyder Senior Member

    0
    Jul 27, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Michigan
    fee simple at market value with no lease vs leased fee
     
  4. john snyder

    john snyder Senior Member

    0
    Jul 27, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Michigan
    lender is requesting market value unencumbered with lease and leased fee
     
  5. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    44
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Stands to reason! Not sure what you have to reconcile--leased fee value is significantly impacted by the presence of an existing lease at a rate that exceeds market.

    Wouldn't factor in two remaining options as they are above market--would have to assume that tenant would act in their own self-interest and renegotiate rate closer to market.

    Good luck!

    Easy enough to give them both values. I would capitalize rents at market and then add the present value of the lease--kill two birds with one stone.
     
  6. john snyder

    john snyder Senior Member

    0
    Jul 27, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Michigan
    thanks - have not participated on here in awhile.. still have good advice..thanks to both of you and happy holidays.

    jbs
     
  7. Michael S

    Michael S Senior Member

    15
    Mar 18, 2009
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    So the lender wants a "go dark value"? Pretty typical for single tenant NNN leased properties. Value of the fee simple is generally 1/3 - 2/3 of the leased fee in my experience. The range is dependent on how far above market the current rent is, and the remaining lease term. A brand new Walgreens might sell for about $6 million with a standard 25-year lease around $30/SF. If that same building was never occupied by Walgreens but instead sold vacant it would be worth about $2 million with market rent around $15-20/SF. These are round numbers but this situation occured in Albuquerque with 6 brand new drug stores for Eckerd. They backed out of the market at the last minute and the developer was left with just the fee simple properties. Several sold vacant for around $2 million, and a few were leased to Walgreens and sold for much higher with long term leases in place.

    For the sales approach find similar properties that have sold vacant. For the income approach use market rents and lease terms with a higher cap rate.

    Keep in mind the leased fee value of the subject will be diminished by the short lease term. Most lenders aren't going to toucha property with only 5 years remaining, they want to see 10+. There's a strong relationship between cap rates and remaining lease term for single tenant NNN properties. In broad terms the cap rate will increase about 10 basis points for every year that's knocked off the lease. So if an identical property with a 20 year lease sold at a 7% cap with a 10 year lease it would be up to 8%.
     
    Last edited: Dec 28, 2011
  8. john snyder

    john snyder Senior Member

    0
    Jul 27, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Michigan
    Michael,

    there is no option to purchase so at the end of 5 years terminal pont, are you using a price that is based on the contract rent or do you project in what the locals might pay?

    thanks

    john
     
  9. Michael S

    Michael S Senior Member

    15
    Mar 18, 2009
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    I would use a price based on market rent. Why would the tenant continue paying above market rent? At the end of the 10 year holding period you're probably going to have a building that's at market rent. Also you have to account for the possibility that the current tenant might leave at the end of their term and then add in lease up costs for the down time, commissions, TI, etc. If it's a good location and there's nothing else available for much less then the tenant is likely to renew, albeit at a rate closer to market.
     
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