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  #1  
Old 11-11-2011, 07:01 PM
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Default Buying out lease with key money

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?
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Last edited by CANative : 11-11-2011 at 07:13 PM.
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Old 11-11-2011, 11:10 PM
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"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!
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Old 11-11-2011, 11:16 PM
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Vacant space, not good.
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Old 11-12-2011, 09:48 AM
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What benefit or detriment would a potential purchaser realize as a result of the action? What is the present value of future benefits?
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Old 11-12-2011, 11:10 AM
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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.
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Old 11-12-2011, 12:09 PM
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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?
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Old 11-12-2011, 12:19 PM
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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.

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Old 11-12-2011, 12:53 PM
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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  
Old 11-12-2011, 01:36 PM
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Quote:
Originally Posted by sail143 View Post
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.
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.
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Old 11-12-2011, 03:54 PM
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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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