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Is there a "black market" for mall leases?

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Vernon Martin

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My client is being asked to finance the purchase of a lease at an ultra-high-end mall in Las Vegas. The buyer is paying $10 million to assume a below-market lease. The lease document states, however, that if a sublease is at a higher rental rate, that any additional rent collected is due to the landlord. This would consequently seem to indicate a value of zero for the leasehold position.

The seller of the lease went through a broker who specializes in selling such leases and supposedly received multiple bids. The buyer told me that this is all being done without the landlord's knowledge, and the landlord is not to be notified of the purchase of the lease, only that it is being assumed. He even provided an MAI appraisal of the leasehold interest at $16 million.

I'm trying to understand if the landlord would have any claim on the purchase amount, due to the contractual stipulation that any additional collected rent is due to the landlord. Moreover, I'd like to know whether there really is a black market for leases that cannot be profitably assumed, and how successful it is. The last thing my client needs is collateral that can drop to zero value if a landlord sues.

VM
 

Lost Cause

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I've never seen any transaction like what you describe here.

Even if there is a (black) market for this kind of thing, it doesn't appear to meet the definition of market value. I don't remember anything about trickery and deception in there.

A strong case could be made that the $10 million price would represent the capitalized value of the market/contractual rent differential, being part of that "any additional rent" mentioned in the lease and due to the landlord.

I would agree with you that any such arrangement would be extremely risky. I'm suprised that it made it through your client far enough to get to you.
 

Vernon Martin

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I'm suprised that it made it through your client far enough to get to you.

Don't be surprised. Small, private lenders don't have underwriting staffs to find these things out. They pay me to do it instead.
 

Phil Sarazen

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If there is no legitimate rent differential, where is the leasehold value. If any excess rents go to the landlord rather than the leasee, there is no leased fee advantage or disadvantage to be considered. Again, where's the value? Sounds like uninformed buyers or deceitful sellers to me.
 

Y-TOWN

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Ohio
sounds like a typical sandwich lease - but the landlord has taken the top slice of bread off.

The $10 million could be looked at as prepaid rent - then the landlord would have claims to it. This is a very stupid deal - like the mall folks couln't fiqure out what is going on.
 

GCJim

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The buyer is paying $10 million to assume a below-market lease. The lease document states, however, that if a sublease is at a higher rental rate, that any additional rent collected is due to the landlord. This would consequently seem to indicate a value of zero for the leasehold position.
VM

I may have missed something here, but I think it depends on what, exactly, the $10 million IS.......is it all RENT? Sounds like the existing tenant has a right to sublet per the original lease. What is the original lease amount? What part of the 10 Mil, if any, is above and beyond the existing lease amount? (WOW....I bet that purchase agreement would be an interesting read........)
 

hastalavista

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California
My client is being asked to finance the purchase of a lease at an ultra-high-end mall in Las Vegas. The buyer is paying $10 million to assume a below-market lease. The lease document states, however, that if a sublease is at a higher rental rate, that any additional rent collected is due to the landlord. This would consequently seem to indicate a value of zero for the leasehold position.

VM
(my bold)

Is there, in this case, a contractual difference between an "assumption" of a current lease vs. a sublease? If there is, then the current tenant may have found a loop-hole in its lease as it would not be subleasing but selling their position and the price paid would not technically be additional rent (but I assume would be the capitalized value of the BMR difference as was earlier posted).
However, I don't know how an outside party can assume a lease without the landlord's knowledge and approval?

This situation sounds as much as a legal issue as a value issue with the second hinging on the first.
 

Stephen J. Vertin MAI

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Jan 17, 2002
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Certified General Appraiser
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Illinois
My replies are italicized and in red


My client is being asked to finance the purchase of a lease at an ultra-high-end mall in Las Vegas. The buyer is paying $10 million to assume a below-market lease. The lease document states, however, that if a sublease is at a higher rental rate, that any additional rent collected is due to the landlord. This would consequently seem to indicate a value of zero for the leasehold position.

So far so good.

The seller of the lease went through a broker who specializes in selling such leases and supposedly received multiple bids. The buyer told me that this is all being done without the landlord's knowledge, and the landlord is not to be notified of the purchase of the lease, only that it is being assumed. Not good, because you say; "The lease document states, however, that if a sublease is at a higher rental rate, that any additional rent collected is due to the landlord". He even provided an MAI appraisal of the leasehold interest at $16 million.

I'm trying to understand if the landlord would have any claim on the purchase amount, due to the contractual stipulation that any additional collected rent is due to the landlord. Yes he would have claim because the lease says he has claim. Moreover, I'd like to know whether there really is a black market for leases that cannot be profitably assumed, and how successful it is. Possibly but it is not legally permissible under your description. Just curious as to why you would care? The last thing my client needs is collateral that can drop to zero value if a landlord sues. It sounds as if there is a very real possibility of this under the current terms of the lease.

Personally I would not think twice about recommending your client pass on the deal.

 

Lawrence R.

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Mar 27, 2007
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South Carolina
Personal Experience.

I owned a Furniture store in a mall once, and we had negotiated a very strong lease...When I lost interest in managing the company, my partner lost interest in owning it.

We had a similar clause that seemingly prohibited our profiting from a sub lease.

The solution? We sold our company to them for 1 dollar, and they simultaneously paid us for the value of the lease the company owned.

Tecnically, there was no sub lease, we were "bought out" bya company who then changed the name of the company and the merchandise it carried.

That was how we got around it. By the way, just in case this was illegal, I had already sold my interest before it happened.
 

Y-TOWN

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Mar 10, 2007
Professional Status
Certified General Appraiser
State
Ohio
I owned a Furniture store in a mall once, and we had negotiated a very strong lease...When I lost interest in managing the company, my partner lost interest in owning it.

We had a similar clause that seemingly prohibited our profiting from a sub lease.

The solution? We sold our company to them for 1 dollar, and they simultaneously paid us for the value of the lease the company owned.

Tecnically, there was no sub lease, we were "bought out" bya company who then changed the name of the company and the merchandise it carried.

That was how we got around it. By the way, just in case this was illegal, I had already sold my interest before it happened.

The 10 million cash purchase price in post #1 must be the buyers estimate of the present worth or PV of the current tenant's lease contract to the buyer, don't know if that is market, but kind of think it maybe is due to the "don't notify anyone" idea - if the 10 million is any kind of a realistic calculation of that lease value, the mall owners would also know that space is rented at less than market and be looking for an end-run on their space. Any transfer would certainly trigger an engagement of the original tenant in a court action by current management. This is a bad deal.
 
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