Valuation Of Leasehold Improvements

[farmers soul]

I have a non typical request from a client to value the leasehold improvements of a demised space within a multi-tenant, mixed use building.

The request is to value the leasehold improvements "as completed". The building is new and the lease is at current, market rate.

I was interested to get some other opinions on how they would go about the valuation of this scenario. Any insight is appreciated!

 

[Sid Holderly]

Without a lease length, it is difficult to select which scenario would be best. Various cap rates,DCF, etc. Availability of other competing properties.

 

[farmers soul]

The original term is 5 years, with 1, 5 year renewal option at market rate. The property is located in a highly desirable area with significant new development, re-development, etc.

 

[Scott.A]

This should be interesting.

 

[Gobears81]

What does the "as complete" value account for vs as is?

I'd be inclined to do a DCF with no reversion, although if the lease is at market and stays near market, the amount of leasehold value is probably $0 or close to it. That is based on the following model:

Fee simple value less leased fee value = Leasehold value

The above model does not work in all cases, but if there is no below market rent to account for in the DCF, then there is no incremental benefit to the tenant that would be manifested in a form of positive leasehold value. But I could be misunderstanding what is taking place in your situation.

 

[nstanbru]

I have a non typical request from a client to value the leasehold improvements of a demised space within a multi-tenant, mixed use building.

The request is to value the leasehold improvements "as completed". The building is new and the lease is at current, market rate.

Describe what you mean by "leasehold improvements".

 

[farmers soul]

Describe what you mean by "leasehold improvements".

The space is currently in shell condition and the Landlord is providing a $25.00/SF TI Allowance and the Tenant will be spending an additional $50.00/SF +/- in leasehold improvements to finish out the interior of their space.

I would agree that the value of the leasehold position is 0, as in this case the fee simple and leased fee values are the same. However, what is the value of the leasehold improvements on day 1 is what i am trying to tackle.

 

[Pittsburgh Pete]

The space is currently in shell condition and the Landlord is providing a $25.00/SF TI Allowance and the Tenant will be spending an additional $50.00/SF +/- in leasehold improvements to finish out the interior of their space.

I would agree that the value of the leasehold position is 0, as in this case the fee simple and leased fee values are the same. However, what is the value of the leasehold improvements on day 1 is what i am trying to tackle.

I would think that they would have value only after the lease expires, possibly yielding higher rent from the next tenant as a function of the tenant's $50/SF expenditure. During the lease term they have no value as they are not generating any additional income to the real estate.

 

[Gobears81]

I would agree that the value of the leasehold position is 0, as in this case the fee simple and leased fee values are the same. However, what is the value of the leasehold improvements on day 1 is what i am trying to tackle.

Sounds like it would be a DCF for the life of the lease based on a variant of:

Market rent based on $75/ SF in TIs

Less: contract rent based on $25/ SF in TIs

Rlf and Ylf < Rlh and Ylh, all else equal

 

[farmers soul]

Sounds like it would be a DCF for the life of the lease based on a variant of:

Market rent based on $75/ SF in TIs

Less: contract rent based on $25/ SF in TIs

Rlf and Ylf < Rlh and Ylh, all else equal

This makes sense. I lost you on the last line though? Can you clarify?