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One last lease question

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Jeff Horton

Thread Starter
Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
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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