Property Rights Adjustment

[Gobears81]

Guys

Sorry to create two threads in as many weeks, but I am a bit stumped on an appraisal and was hoping to get some insight. I am appraising a proposed property in which the developer is constructing a building and leasing it out as a shell. I don't have a ton of great "shell" rents for this type of property, though I do have one that is quite comparable. Based on both that comparable rental and an adjustment to the other comparable rentals based on the percentage of costs going towards build out, the rents are a decent cushion above market. But, the tenant is doing a significant degree of build out themselves and based on the property, as built out, the rents would actually be below market.

I suppose that this isn't entirely different from other cases where the property is leased as a shell and the tenant does build out. Nonetheless, it feels off to make a negative property rights adjustment on an above market lease. Any thoughts on the best way to handle this?

Thanks

 

[Terrel L. Shields]

Segregate the buildout as trade fixtures, which should have shorter econ life

 

[KHS445]

With your experience I am sure you have scoured the lease trying to find something. I would recommending taking another look to see if there is anything special about the terms like; purchase options, first right of refusal, length of lease, reduced rents for a period of time, lower than normal inflation clauses, previous relationship between the developer and the tenant, building availability, broker involvement, etc. Also is there something special about the location for the tenant? Is this their only location or is this property near another one of their locations? Is there something special about the shell building like office area, eave height, exterior parking, zoning, power supply, supplier/customer located nearby, etc.

Can the tenant provided improvements be split into real and personal or considered specialized? Would the market consider some of the proposed improvements personal property vs. real property. Is it possible that some of the improvements may be super adequate for this building in the general market and be more tenant specific.

Not saying there is, but many times if one digs deep enough support for the rental rate whether above or below the market can be found.

 

[Vernon Martin]

This is a common problem in appraising properties leased to specialized retailers such as Walgreen's or McDonalds. You haven't mentioned the purpose of the appraisal, but my lender clients prefer such properties appraised "as dark", in which case much of the build-out is considered as a functional superadequacy with limited resale value.

 

[Gobears81]

I thought it through and the concept isn't all that different than above-market rents from a ground lease yet with positive leasehold value remaining. Should have thought of that before-guess these are the times that we have to step away from the computer for a bit and take a weekend