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One last lease question

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Jeff Horton

Senior Member
Jan 15, 2002
Professional Status
Certified Residential Appraiser
OK finally have this one wrapped up or really close to it. 99 lease, 5 year renewable term. 5% increase every 5 years in rent. Absolutly no data to determine a cap rate or any sales. Here is my assumption about my rate i used to calculate the Present Value of the lease. Would love some input on this one before I print it out.

2. No income data was available for land in the subject’s area nor were sales of leased land found for the Appraiser to analyze to determine a capitalization rate. The appraiser analyzed Federal Reserve historical data of rates of 10-year Treasury Constants and Historical Mortgage rates in an effort to determine a safe rate of return for a ten-year investment. This rate was estimated to be 5%. The terms of the lease state it shall be automatically renewed unless the tenant gives notice within 90 days of the end of the current term. I have assumed that the lease has recently been renewed or will be renewed and will be in effect for another 5 years. An investor would then be guaranteed income for the 5 year period of the current term of the lease. At the end of the lease term the investor faces a risk of the lease not being renewed and a possible loss on his investment. In return for assuming this risk it is assumed the investor would want a larger rate of return than he could make in a safe investment to justify the risk. Based on the data analyzed by the appraiser it is assumed that a 10% rate of return would be expected by potential investors.
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