Got Some Questions About A Proposed Property On A Leased Site

[Elizabeth Beck]

I got an assignment involving a proposed car wash on a site that is leased from the developer of the master planned project (Kennesaw Marketplace).

• My first question is this: since car wash properties are not known to be leased to operators typically (normally owner-operated), is there support for including an Income Capitalization approach?
• Regarding the Cost Approach, is there any reason to value the land, even though on a proposed project we typically value the land as the "as is" value.
• Lastly, on the Sales Comparison approach, the land value would be useful if the adjustments to the comparables reflected fee simple lots whereas the subject is a leased lot.

Thanks for thinking about this!

 

[Gobears81]

• My first question is this: since car wash properties are not known to be leased to operators typically (normally owner-operated), is there support for including an Income Capitalization approach?

-Car washes often sell at certain gross sales multiples and EBITDA multiples, so yes, the income approach is applicable.

• Regarding the Cost Approach, is there any reason to value the land, even though on a proposed project we typically value the land as the "as is" value.

-If I follow your question correctly, yes you should consider the fee simple value of the land. If the land lease is for 40-years, that is probably just as long or longer than the anticipated life of the car wash, so the reversion would be the fee simple value of the land at that point. Also, if the ground rents are significantly higher or lower than market rent, there is partial interest value (though there is already leasehold value given the car wash being constructed on leased land) and that may affect the selection of your discount rate.

• Lastly, on the Sales Comparison approach, the land value would be useful if the adjustments to the comparables reflected fee simple lots whereas the subject is a leased lot.

-I would personally opt to initially analyze the property based on fee simple interests, then deduct the leased fee interest in the land subsequently to determine leasehold value. There are other ways to go about this, but that would be the most straightforward way to go.

 

[Howard Klahr]

is there support for including an Income Capitalization approach?

Yes, owners of commercial properties do so for the income generating capabilities of the property. And if you do a quick google search you will find several net leased car wash properties. Maybe not in your area/market but they do exist.

is there any reason to value the land

Yes, as you already noted below you will likely need to make adjustments between fee simple properties and leased fee as well as consideration for location adjustments.

the land value would be useful if the adjustments to the comparables reflected fee simple lots whereas the subject is a leased lot.

See above comment

 

[Gobears81]

Yes, owners of commercial properties do so for the income generating capabilities of the property. And if you do a quick google search you will find several net leased car wash properties. Maybe not in your area/market but they do exist.

This reminds me a little of restaurants. They frequently sell based on multipliers of income or gross sales, but there are also the leased properties purchased by passive investors. The percentage of sales often provide a range of potential rents. Of course, there is also the highest and best use analysis determining whether the most likely purchaser is an owner or an investor, and the suitability of the location and property is a consideration in that determination. Not disagreeing with you necessarily, just wanted to see how you feel that this would tie in.

 

[Howard Klahr]

Fast food restaurants, gas stations, drug stores, car washes, day care centers, etc. All are special purpose properties. Current trends in the market are for operators to utilize net leased properties in order to significantly reduce corporate assets on the balance sheet in that the net lease properties generally represent a lower cost of capital to the tenant as opposed to owning the real estate and provide greater liquidity. Hotels have moved into this trend as well, it is just that more REITs and institutional investors have taken on a larger share of this market as opposed to net lease investors.

 

[Gobears81]

Fast food restaurants, gas stations, drug stores, car washes, day care centers, etc. All are special purpose properties. Current trends in the market are for operators to utilize net leased properties in order to significantly reduce corporate assets on the balance sheet in that the net lease properties generally represent a lower cost of capital to the tenant as opposed to owning the real estate and provide greater liquidity. Hotels have moved into this trend as well, it is just that more REITs and institutional investors have taken on a larger share of this market as opposed to net lease investors.

I appreciate this answer, and there is undoubtedly truth to it. That immediately brings a question to my mind though. If the locational/property specs of a property are not suitable for a passive investor, owner occupants will be the most likely purchaser. Should the gross sales/ EBITDA multipliers be considered only in cases where it is suitable for an owner occupant, but when a passive investor is the most likely user, should we just limit the analysis to an examination of comparable rentals and disregard projected or historical performance? I've done quite a few hotels, and I have a hard time bringing myself to just analyze comparable rentals and cap out NOI from them. Then again, pretty much all of the ones that I've done aren't encumbered by leases of the type that you mentioned