Mini storage appraisal

[runner52]

I am appraising a mini storage facility. The seller is occupying roughly 40% of the units and not paying rent. The only way the buyer can justify the price that the seller wants (and is being firm on) is to have a master lease with him. He will pay the buyer $50,000 upon closing and vacate all of the units so the buyer can lease them up. I am figuring this $50,000 into "other income" but I'm not sure if I need to make a big deal out of this master lease other to mention it and account for the income. The master lease is good only for one year while the buyer leases the vacant units up. Thoughts?

Thanks.

 

[Terrel L. Shields]

Why is he paying the buyer?

 

[Michael S]

I assume this is a pretty small facility if the seller is occupying 40% of the units. I would count them as vacant and figure out what the value would be as stabilized, then back off from there to get your as is value. Whatever your lease up discount is, deduct that $50,000. If the self storage market is pretty good the buyer may be able to lease up all those units in a matter of months and not really have much of an income loss, plus they get an additional $50,000 from the seller. Or is the seller just going to reduce the price by $50,000? Maybe this is some scheme to let the buyer finance more. Perhaps the two parties are somehow related. It all sounds very odd.

 

[PL1957]

Master leases used to be very common for office/retail in 2005-2007. They gave the purchaser a "stabilized" cash flow during a property's lease up period and made financing a lot easier. Often, there were various earn out provisions that reduced the amount paid based on occupancy, after accounting for TIs and LCs. I've never seen it used for a self-storage property.

At first blush, I would simply include the master lease income as regular rental income. Self storage lease tend to be short term in nature with a significant annual roll anyway. If it's a solid market without an oversupply, I would think lease up shouldn't be an issue.

 

[AustinM]

I am appraising a mini storage facility. The seller is occupying roughly 40% of the units and not paying rent. The only way the buyer can justify the price that the seller wants (and is being firm on) is to have a master lease with him. He will pay the buyer $50,000 upon closing and vacate all of the units so the buyer can lease them up. I am figuring this $50,000 into "other income" but I'm not sure if I need to make a big deal out of this master lease other to mention it and account for the income. The master lease is good only for one year while the buyer leases the vacant units up. Thoughts?

Thanks.

I would determine the prospective stabilized value and then deduct lease-up costs to arrive at the As-Is. Since the $50,000 would be paid at closing time, I would apply a one-time adjustment (master lease) to the as-is value. Negotiating the $50k master lease was smart, as it will off-set some, hopefully all, of the lease-up costs. Note that putting the $50k in other income in the direct cap method assumes that it would continue into perpetuity.

 

[Michael P Jacobs MAI]

Just to be clear, "The master lease is good only for one year while the buyer leases the vacant units up" implies a concession, not a lease. As AustinM writes, this is a simple non-reoccurring concession and not lease revenue. It's DONE as soon as the transaction closes from your lender's perspective. So, you simply have a 40% vacant facility and the purchase price is $50,000 less than the contract. You'll need an absorption analysis to stabilize. Perhaps the $50,000 will be the NPV of your lease-up discount, since that is what buyer and seller intend, but your analysis will tell you that (hint).