Absolute Net verses Ground Lease

[aalderman1]

Hi all,

I'm appraising a nice bank branch with a fifteen year absolute net lease with twenty years worth of renewal options. A quick perusal of transactions of similar properties shows there are roughly two bank ground leases, and subsequent sale to an investor, for every improved lease/sale of a bank branch (in this market of course).

I've got enough sales and leases of improved properties so I don't need the ground leases, but this trend brings up several issues in my mind, for which I'd love to get some feedback.

1. The ground leases are trading at a lower cap rate 150 to 200 basis point, so it's clear investors see them as a safer investment. Should I discuss this in the report somewhere?

2. What are the main differences between an absolute net lease and a ground leases, since in the absolute net lease the property owner pays absolutely no expenses and the improvements revert to the property owner in both cases? Sub-question (perhaps, my real question): Why are the ground leases trading at such a significantly lower rate?

3. Would it be appropriate to discuss the bank ground leases as support for the improved sale/lease data?

Thanks in advanced for the responses.

 

[DanBuck]

Hi all,

I'm appraising a nice bank branch with a fifteen year absolute net lease with twenty years worth of renewal options. A quick perusal of transactions of similar properties shows there are roughly two bank ground leases, and subsequent sale to an investor, for every improved lease/sale of a bank branch (in this market of course).

I've got enough sales and leases of improved properties so I don't need the ground leases, but this trend brings up several issues in my mind, for which I'd love to get some feedback.

1. The ground leases are trading at a lower cap rate 150 to 200 basis point, so it's clear investors see them as a safer investment. Should I discuss this in the report somewhere?

2. What are the main differences between an absolute net lease and a ground leases, since in the absolute net lease the property owner pays absolutely no expenses and the improvements revert to the property owner in both cases? Sub-question (perhaps, my real question): Why are the ground leases trading at such a significantly lower rate?

3. Would it be appropriate to discuss the bank ground leases as support for the improved sale/lease data?

Thanks in advanced for the responses.

Well I would say that with ground leases you have the possibility of getting hold of the improvements that you did not pay money to build or buy, unlike the absolute net lease where you did build or pay for improvements. The lower cap rate for the ground lease accounts for this possible added benefit..

 

[josephdifranco]

Cap rate

Building cap rate should be higher than the land cap rate. I see where the two lease types seem to be the same though.

Cap rates can also vary based on the tenant. If you have different banks, they may have different credit ratings which could account for the difference in the cap rates.

 

[Michael S]

Something that seems to be overlooked but some investors is that there is no depreciation for tax purposes with a ground lease (leasehold). The leased fee position with an absolute net lease however allows you to take depreciation on the improvements. In general a ground lease will reflect lower risk and therefore a lower cap rate.

 

[aalderman1]

Thanks all, those were my conclusions as well. I just wanted to get some feedback.

On another note, my OP apparently showed up in an auto google search a Net Lease brokerage company called The Boulder Group (http://www.bouldergroup.com/) has set-up and a research analyst got in touch through LinkedIn. I called him, and he actually had some great information and didn't try to sell me anything. So, one more reason to post in the Appraisers Forum, the advice/feedback/loving criticism you get here, and the advice you can garner from the web just for posting here.