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Ground Lease Analysis

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InfoQuest1

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Certified General Appraiser
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California
[FONT=&quot]Hi everyone, i am newbie to the forum based in Los Angeles. After learning about the Appraisers Forum site and reading many posts i am glad and honored to be among fellow appraisers and look forward to great discussions.[/FONT]
[FONT=&quot]
I do have a question and hope to get some answers about a job i am looking into.

Anyone with long-term Ground Lease familiarly please comment as to how and what type of valuation method should i consider when valuing the ground lease interest?[/FONT]

[FONT=&quot]Particulars of the ground lease are detailed as follows:[/FONT]
[FONT=&quot]The subject property, built in 1957, is a large single tenant industrial building containing 57,600 square foot situated on a 9.51 acre parcel of land held under a ground lease. [/FONT][FONT=&quot]The ground lease commenced on October 18, 1957 for a term of 25 years at a monthly rental rate of $2,916.66. The agreement also comments on the right and option to extend this lease for one or more of 6 consecutive periods of 10 years, with increases of $667.00 per renewal term, the lease ends in 2042. The valuation calls for a current date of value. Current contract rent is $4,917 monthly or $59,000 annually. Leading rental rates research are about $6.00 or $345,600 annually applied to the subject’s square footage (the leasedhold is sitting pretty). Based on the market approach the value of the land and building are dancing around $174.0 P/SF or $10 Mil. Thank you.[/FONT]
 
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Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
Are you valuing the leased fee or the leashold?

If leased fee the approach would be to discount the remaining net rental payments (be sure to account for applicable expenses under the lease agreement) plus the anticipated reversion to a present value (DCF)
 

InfoQuest1

Thread Starter
Freshman Member
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Certified General Appraiser
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California
It is my understanding the leased fee is to be appraised since the property is encumbered by a lease. What i cannot figure out is this; the client holds the master lease and i am asked to value the ground lease which appears to be 83% below market value. Also, this appraisal would be preformed for estate purposes and not a lending agency. The lease is structured where the tenant pays for all expenses (absolute NNN lease).
 

Wayne Tomlinson

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Jan 25, 2005
Professional Status
Certified General Appraiser
State
Illinois
If you are doing the appraisal for estate settlement purposes, be sure and take a look at the new IRS regulation concering "qualified appraiser" under the PPA law.

Google New IRS guidelines for estate valuation.

It, among other things, provide for severe penalties for the appraiser for mis evaluation.

Up to one and one half the amount of the mis evaluation.

It seems that most estate lawyers are not familiar with it yet and it has been the law since 2006.

Wayne Tomlinson
 

WAI

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Jan 23, 2007
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Certified General Appraiser
State
California
I would approach it as a discounted cash flow problem as mention in the prior post.

Jeffrey T. Warren, MAI, SRA
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
I would approach it as a discounted cash flow problem as mention in the prior post.

Jeffrey T. Warren, MAI, SRA


Mr Warren,

I certainly would not disagree with you, since the only real value of this property given such a long term lease (and Id guess the option periods would be exercised given the much below market rate of the lease) lies in the income stream. My question would be what discount rate would you use over the term of the DCF and what would be your reasoning?

Just thinking this through myself and wondering what your thoughts are.
 

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
It is my understanding the leased fee is to be appraised since the property is encumbered by a lease. What i cannot figure out is this; the client holds the master lease and i am asked to value the ground lease which appears to be 83% below market value. Also, this appraisal would be preformed for estate purposes and not a lending agency. The lease is structured where the tenant pays for all expenses (absolute NNN lease).

First, let's work out some terminolgy here. Just because a property is leased does not mean that your assignment is to value the lease fee. In accordance with USPAP, you need to understand what you are appraisng when you are engaged to perform the assignment. In fact, a lease creates two estates, a lease fee and a leasehold, both of which can be valued and do not necessarily equate to the value of the whole.

Secondly, what is a "master lease"? And finally, how do you know that the "ground lease" is 83% below market value? Do you have ground lease rent comps?
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
First, let's work out some terminolgy here. Just because a property is leased does not mean that your assignment is to value the lease fee. In accordance with USPAP, you need to understand what you are appraisng when you are engaged to perform the assignment. In fact, a lease creates two estates, a lease fee and a leasehold, both of which can be valued and do not necessarily equate to the value of the whole.

Secondly, what is a "master lease"? And finally, how do you know that the "ground lease" is 83% below market value? Do you have ground lease rent comps?


Sounds like there is a "master lease" for the ground and subleases or sandwich positions also in play. I would assume since the poster is Cert General he would know what he is appraising and have data to support the existing market rent / or value from which market rent can be calculated.
 

InfoQuest1

Thread Starter
Freshman Member
Joined
Oct 7, 2008
Professional Status
Certified General Appraiser
State
California
Wayne-
thank you for pointing to the New IRS guidelines for estate valuation info.

Jeff-
Can you please follow up on PropertyEconomics post with regard to the discount rate you would apply over the term of the DCF and what would be your reasoning?

Howard-
good question - The "master lease" is the controlling lease to subsequent leases. In this case, the estate (the client) wants to value the ground lease (master lease) they hold. Ground lease rent comps were located within the county which is my basis for the 83% figure.

PropertyEconomica-
Only the master lease is in play.

Thank you all for your comments and please keep them coming
 

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
OK, with the understanding that you are valuing the lease fee estate, it is a safe assumption based upon your assertion that the contract rent is below market rent that the tenant will likely continue to exercise their renewal options. That said, you would then value the net cashflow over the remaining therm of the lease agreement assuming all options have been exercised. I will assume your valuation date is current, but if not just adjust the time fram accordingly.

Option 3 Oct 2008 thru Oct 2012 - $4,917 per mo
Option 4 Oct 2012 thru Oct 2022 - $5,584 per mo
Option 5 Oct 2022 thru Oct 2032 - $6,251 per mo
Option 6 Oct 2032 thru Oct 2042 - $6,9,18 per mo
Reversion - land value in Oct 2042
 
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