Option To Purchase - Master Lease -

[NachoPerito]

How would you treat these scenarios?

A) Market value of an office building is $1.8M but there is an option to purchase for $1.4M that the buyer is planning to exercise. How do you address that?

B) There is a master lease on the office building at $9k/month with 9 months remaining and no options to extend, but they have an option to purchase for $1.4M and there are subleases under the master lease that total an income of $16k/month. How would you get to the 'as is' value if it is likely the tenant will exercise the option to purchase the property.

Hopefully that makes sense!

Assume typical bank client, yada yada

 

[hastalavista]

The market value of the property is the market value, no?
The option exists for one party to purchase at a price below market. Their option-price doesn't change the market value.

I'd contact the client and ask them if they have any special instructions, but if not, I'd simply disclose the option (as required by the USPAP).

 

[Gobears81]

If I understand this correctly, the leased fee value based on hypothetical condition that purchase option does not exist is $1,800,000.

With that said, market value of leased fee estate including purchase option is $1,400,000. No buyer would pay any more than $1,400,000 for this interest if the tenant can turn around and cause them an instant loss. But, if it is for mortgage purposes for the option purchaser (with them being the borrower), perhaps the incorporation of the option into the future is less relevant, as it has already been, or is in the process of being, exercised? I suppose it all depends on the intended use.

 

[nstanbru]

Most likely the option purchase price was established sometime in the past, probably at the start of the lease. Does the purchase option have to be exercised by a certain date, and if not exercised by that date, does it expire?

 

[Michael P Jacobs MAI]

The market value of the property is the market value, no? The option exists for one party to purchase at a price below market. Their option-price doesn't change the market value.

Very interesting case! Ignoring the lease revenue issues, there is a leasehold value of $400,000. FS=LF+LH. So, the fee simple value is $1.8 but the leased fee value is $1.4, no?

 

[hastalavista]

Very interesting case! Ignoring the lease revenue issues, there is a leasehold value of $400,000. FS=LF+LH. So, the fee simple value is $1.8 but the leased fee value is $1.4, no?

Yes- I was too quick to pull the trigger on the "it is what it is" without differentiating between the different interests.

 

[NachoPerito]

If I understand this correctly, the leased fee value based on hypothetical condition that purchase option does not exist is $1,800,000.

With that said, market value of leased fee estate including purchase option is $1,400,000. No buyer would pay any more than $1,400,000 for this interest if the tenant can turn around and cause them an instant loss. But, if it is for mortgage purposes for the option purchaser (with them being the borrower), perhaps the incorporation of the option into the future is less relevant, as it has already been, or is in the process of being, exercised? I suppose it all depends on the intended use.

True, it would be $1.4M, but we are getting deep in the weeds here. Usually the client doesn't want that information so you make assumptions or hypothetical conditions to get at what they want.

 

[NachoPerito]

Very interesting case! Ignoring the lease revenue issues, there is a leasehold value of $400,000. FS=LF+LH. So, the fee simple value is $1.8 but the leased fee value is $1.4, no?

Yes, this seems right.

 

[NachoPerito]

Thanks for the replies. Since the master lease is essentially month to month and is less income then the income from the individual subleases (by a wide margin), we are ignoring the master lease. Either they buy it for $1.5M or the owner takes the property and the management of the subleases because it results in a higher value.

So the report will look like this: Market value of the leased fee estate is $1.8M BUT IT IS NOTED THAT THE CURRENT TENANT HAS A RIGHT TO PURCHASE THE PROPERTY FOR $1.5M!

 

[Michael P Jacobs MAI]

...So the report will look like this: Market value of the leased fee estate is $1.8M BUT IT IS NOTED THAT THE CURRENT TENANT HAS A RIGHT TO PURCHASE THE PROPERTY FOR $1.5M!

Extraordinary Assumption.