Improved Commercial Land but we have only As If Vacant Appraisals

[CR Gray]

My relatives and I are co-owners of an AZ parcel, land only, that currently has an 11-year lease (55-year lease just ended). The sole tenant is a community college district for quite a few years. They have improved with one building (61K sq. ft.) which is their satellite campus, carport, etc. (Upon end of lease the improvements are ours but tenant holds the first right to seek continuance of lease beyond this 11 years).

The college now wants to buy the land from us (the first conference call on this was 2 days ago) but are suggesting their appraisal is as high as they can go due to Arizona's Gift Clause. Short of getting into that (we are looking at what they sent on this; so far we have 2 appraisals (not at our initiation; one is 1.5 years old and shows higher value than one they just provided) Both are 'As if Vacant' yet every one of the 12 property comps were vacant land, unlike ours )....We hope to request to commission a 3rd appraisal that would use the cost basis method (or some combination?) for a more accurate valuation of fair market value for this improved land. As we have been told, improvements add value to the land. Would this 3rd method seem viable and appropriate for these circumstances?

 

[TerryRohrer]

Are you bound to extend the lease if they demand that, or do they just have the right to lease it if you were to find an alternate tenant?

 

[George Hatch]

Technically what they would be buying is the lessor's position (landlord) because they already own the lessee's position (tenant) with the existing lease as well as control of the option to renew at the end of the existing lease. They already own whatever the present value is of the last 11 years worth of lease payments plus the present value of the hypothetical 2035 resale price, all being subject to discounts for inflation.

Office buildings have a limited economic lifespan, and this building will be 11-years older at that time. If the building was built 30 years ago it's contributory value to the land may not be that high. For example, if the building is already 35 years old and the overall economic lifespan is 50yrs, then a 44-yr old building at the end of this 11 years may already be nearing the end of that buildings economic lifespan., It is not uncommon for colleges to redevelop on their campuses, demolishing older and obsolete buildings to be replaced with new buildings. Such demolition costs are part of their math, too.

This is a fairly complicated appraisal scenario and it's likely that these different appraisals were prepared for different types of users and possibly asking different types of questions. I doubt anyone here will be able to give you a definitive answer that you could use. Not without seeing these appraisals in order to figure out what they were doing.

 

[CR Gray]

Let's see if I understand...If we do not reach an agreement to sell the land to them, then our 11-year lease continues, or they could exit the lease and go elsewhere, not likely, and we'd need to find a new tenant or put the land on the market. The original lease agreement puts it in their court. This 11-year continuation was a stipulation of the original lease agreement (1969) and also states that the tenant also has 2 more 11-year continuances if they desire.

 

[CR Gray]

Technically what they would be buying is the lessor's position (landlord) because they already own the lessee's position (tenant) with the existing lease as well as control of the option to renew at the end of the existing lease. They already own whatever the present value is of the last 11 years worth of lease payments plus the present value of the hypothetical 2035 resale price, all being subject to discounts for inflation.

Office buildings have a limited economic lifespan, and this building will be 11-years older at that time. If the building was built 30 years ago it's contributory value to the land may not be that high. For example, if the building is already 35 years old and the overall economic lifespan is 50yrs, then a 44-yr old building at the end of this 11 years may already be nearing the end of that buildings economic lifespan., It is not uncommon for colleges to redevelop on their campuses, demolishing older and obsolete buildings to be replaced with new buildings. Such demolition costs are part of their math, too.

This is a fairly complicated appraisal scenario and it's likely that these different appraisals were prepared for different types of users and possibly asking different types of questions. I doubt anyone here will be able to give you a definitive answer that you could use. Not without seeing these appraisals in order to figure out what they were doing.

Yes the buildings are older, I think built in late 80s or 90s. The AZ county property records site shows a 2024 Fair Market Value for improvements as $8.5 million; its assessment history, projected, states for 2025 $8.8 Million. The 2 land As If Vacant appraisals are for $3.3 mil ('22) and $2.9 million (this March. Doubt that property values have decreased in this large city in the last 1 1/2 years.

 

[George Hatch]

Depending on the terms of the lease their 3rd option might be to sell their lease (and the first right of refusal for renewal) to a different tenant. They may or may not have the right to exit their lease early.

 

[CR Gray]

Let's see if I understand...If we do not reach an agreement to sell the land to them, then our 11-year lease continues, or they could exit the lease and go elsewhere, not likely, and we'd need to find a new tenant or put the land on the market. The original lease agreement puts it in their court. This 11-year continuation was a stipulation of the original lease agreement (1969) and also states that the tenant also has 2 more 11-year continuances if they desire.

This was in reply to Terry

 

[CR Gray]

Depending on the terms of the lease their 3rd option might be to sell their lease (and the first right of refusal for renewal) to a different tenant. They may or may not have the right to exit their lease early.

I will read through to see what I can on this, thank you.

 

[Terrel L. Shields]

If it is their building, they can tear it down and move it.

 

[George Hatch]

Yes the buildings are older, I think built in late 80s or 90s. The AZ county property records site shows a 2024 Fair Market Value for improvements as $8.5 million; its assessment history, projected, states for 2025 $8.8 Million. The 2 land As If Vacant appraisals are for $3.3 mil ('22) and $2.9 million (this March. Doubt that property values have decreased in this large city in the last 1 1/2 years.

A building built in 1990ish will be 45 years old by 2035, and older than that if a lease extension of another 5, 10, or 15 years is executed.

I don't know about this location but some parcels at the universities have been redeveloped with dorm housing as being more profitable to their operations than classrooms. The current trends in live instruction vs distance instruction and the outright failures of some colleges may play into the decision making.

Also of consideration is the point that the rentals of large single tenant office buildings run at a different pace than multitenant office buildings.

Like I said, this could be a really complicated valuation.