Appraising a long term lease where a hotel building straddles the property

[PaulTW]

I've been asked to appraise a hotel property land lease. The lease is over 40 years old - with twenty more years to go. The hotel owners own the adjoing property - and the 10 story hotel straddles the two parcels. The owner of the hotel has offered to buy out the lease at a ridiculously low amount. The owners of the lease are not motivated to sell - unless they are offered a reasonable amount that includes the value of the improvements (the portion straddling the property). The lease states that an the end of the lease any improvements built will revert to the land owner.

So to value today the remaining income of the lease under reversion + the % value of the improvements?

Any examples, thoughts?

Paul

 

[George Hatch]

How old are the hotel improvements and does the main structure straddle the lot lines? Hotels have a limited economic lifespan. 20 years from now the remaining economic life may be at or approaching zero. Which party has to demolish in the event it comes to that?

Maybe the adjacent property owner (or a tenant) will be motivated to re-do the land lease for a shorter lease term at an enhanced rental rate. Heck, depending on the lease terms the rental rate for the land might already be elevated relative to its value as vacant - I've seen that happen lots of times.

Highest/Best use of the underlying land might still be a hotel 20 years from now, or it might be multi-family. Come to think of if, in our region the local govts have been buying hotel/motel properties and converting them to homeless and low income housing, so an adaptive re-use might eventually part of the consideration, too.

How has the hotel operation been going over the last few years in particular? Because it's also common for a hotel business to fail as the result of just a couple of bad years. This building might go dark long before the land lease ends.

 

[PaulTW]

Built in 1986 - 11 story 278 unit hotel - well maintained - probably effective age of 20 years. The portion of the hotel building on the land is probably about 60%. To confuse it even more - there is an adjoining multi-story garage - that you have to traverse the property to access.

 

[George Hatch]

Personally, I avoid hotel/motel assignments just on general principle. Nothing larger than what an owner-operator would buy. So this discussion is already over my head.

278 units and appears viable implies an excellent location. But the bones of the structure will still be 60 years old by the end of the lease regardless of how much remodeling they do.

The lessee's motivation to buy may be to control the cost of the land lease. Like I said before, if the terms of the lease include a fixed rate of increase the current rents may already be out of line with the value of the land itself. The lessor might end up with nothing but a cost to cure 20 years from now because the moment the lessee figures out they can't keep going this way they'll stop upgrading the building. Or, they might seek a big decrease in the lease rate to put it back in line with the land values - a renegotiation may happen long before the end of the lease.

Or not. I don't do these so you might be better off disregarding all of the above.