No BEV.* No excess EI.
It is a leased fee value where the national credit tenant is leveraging the strength of its balance sheet as a corporate strategy with access to Wall Street monies. Walgreens is the poster child of this product. The lease takes on the characteristics of a corporate bond when the term of the lease approaches economic perpetuity, so these properties actively sell using 0% vacancy. Guaranteed by the parent as a bonded absolute lease (which terms protect the landlord more than the typical NNN lease), they are priced to sell at a very low capitalization rate. Not only are the buildings insured to be rebuilt to be brought back to operation (so no insurance gap), but even the income stream can be guaranteed. The investor/landlord does nothing but receive an auto-deposit check. Nevertheless, it is still a lease with a gigantic negative leasehold. You see $35/sf rents for 60 years including options, sold to investors at a face cap rate of 5.5% or so, for a price of $637/sf. In weak, often mid-west regions, it may be priced at a 6.0% or 6.5% cap rate while having a fairly similar rent rate. What is being bought and sold is the tenant's risk/lease terms and regional location all of which are factored into the capitalization rate. No different than a US government leased building, you are confident they're not going to skip town or fold up. The national corporation that does these sales-leasebacks receives a large net cash increase on their balance sheet as it is far in excess of the construction cost. They then use these monies to expand new locations. It's a lease used as a corporate strategy. If Warren Buffet or Oprah was to rent your house for double its market rent for 20 years, you know they're good for the money and an enforceable lease, so thus, the leasehold would be excessive and real value. Same here. (Conversely, if the local seller does a sale-leaseback but at a far below market rent rate for their business, this is a positive leasehold resulting in a lower sale price.)
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The Assessor's task, though, is to determine equivalent fee simple. Here is where the fight starts. The Assessors struggle to determine this. Some Assessors use a cost approach of a normal retail building -- others Assessors have used the sale prices (described above). While Walgreens is easily an extreme, it is challenging to determine if other national credit tenants are following the same strategy or if they and their build-to-suit developers are setting a lease rate based on a market return on and off the land and building.
The buildings are functional as they do get occupied by 2nd generation tenants at 2nd generation physically depreciated market rental rates. The tax agents use 2nd generation buildings, 2nd generation buildings from inferior neighborhoods, vacant distressed buildings, and then argue this is the fee simple equivalent. Deed restrictions, they're not going to economically -- key word -- become effective until the tenant vacates the building. If a 40 year lease, then the affect of the deed restriction would be discounted to present value as minimal.
* The BEV argument opens a new can of worms and the argument falls apart. There is an active and a wide market of buyers from national portfolios to the little old lady who retires out of an actively-managed risky real estate portfolio for a passive less risky asset. These buyers all willingly pay the market 5.5%-6.0% cap rate of face rent. If you're to attempt to partition this income stream for BEV, the BEV discount rate is much higher, the duration is shorter. There is nothing transferable, being partitioned, or functioning separately, attributes of business value. it becomes counting the number of angels on a pinhead. There is no evidence of BEV occurring in the market, analytically or in actuality. When a Blockbuster goes bankrupt, they having followed a similar corporate strategy, then the investor takes a "haircut" off the leased fee value and the real property gets re-priced by the market to fee equivalent market rents and terms.
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