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Industrial Leasehold Valuation

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BigBlueGA

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Mar 13, 2002
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Certified General Appraiser
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Georgia
Got a request to appraise a leasehold interest in a light industrial property and I'm thinking I may have to turn it down on competency. Am I wrong in thinking that the value of the leasehold estate is simply (assuming a good strong lease with terms permitting) the difference in contract rent versus market rent, capitalized over the term of the lease??? I have experience in industrial property but none with a leasehold, is it really this simple or am I looking in the wrong direction?

- Brandon
 

BigBlueGA

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Certified General Appraiser
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Georgia
I should also add that there's no other leasehold interests involved, no sandwiches.

- Brandon
 

PropertyEconomics

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Jun 19, 2007
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Certified General Appraiser
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New Mexico
Brandon .. capitalizing in my mind would suggest in perpituity ... perhaps use of a discounted cash flow, using an appropriate discount rate would be more appropriate unless the lease is very long term.
Is there a marketable difference between contract rent and market rent?
 

PL1957

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Jul 19, 2004
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Certified General Appraiser
State
Illinois
Usually, when I've seen leaseholds of industrial property, it simply means that the improvements are situated on leased land, usually some type of governmental authority (airport, port authority, etc.). The simplest way of looking at this leasehold value is to treat the ground lease expense as another expense item and then, depending on the situation, either do a direct cap or a dcf. Most of the ground leases I've seen have been long term, so there really isn't any question as to what happens at the end of the ground lease.
 

BigBlueGA

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Mar 13, 2002
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Certified General Appraiser
State
Georgia
Sorry, I say capitalization but I really mean DCF. The lease is 15 years with only 6 years remaining. This is indeed with an Industrial Authority (rent is paid in accordance with the bond issued by the authority plus additional rents) and I'm awaiting the lease to read through it, I have a feeling that this and talking with the industrial authority tomorrow will clear up a lot of my questions. The lease gives the lessee three options: a) to purchase the property at the end of the lease, b) to terminate the lease upon full repayment of the bond, or c) to purchase vacant portions of the property. Don't know what actual rent is yet, haven't seen the actual lease agreement yet (only have the "short form" lease filed in public record which is essentially just notification of the real lease) or gotten into the nitty gritty, still just trying to determine if this is something I can do or if I need to pass it along.
 

Fred

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Jan 15, 2002
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Retired Appraiser
State
Virgin Islands
Sorry, I say capitalization but I really mean DCF.
DCF is a form of capitalization.
 

Howard Klahr

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Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
The answer to your question lies within the terms for the three options outlined above. In order to provide an accurate answer to your question, more details are needed.

However, no the leasehold value in this situation does not likely equal the fee simple less the leased fee (i.e. - the sum of the parts does not equal the whole). Do you really believe that a leasehold interest with only a 6yr remaining term would be very marketable without a substantial discount? Especially since the options you outlined appear likely to require further additional capital outlay? Unless the lease provides favorable purchse terms? Unknowns until you obtain complete details.
 
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