Valuation Of Leasehold Improvements

[Gobears81]

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

Both cap rates and discount rates are higher for leasehold than leased fee due to greater risk, although the leasehold cap rate might be even higher due to a lack of a reversion.

Say that you have a multi-tenant building that is 95% occupied. If vacancy temporarily increases from 5% to 30%, there is a good chance that you still have a positive cash flow. But say that there is a ground lease - that loss in occupancy might be a big enough to cause your cash flow to go negative.

Bad example and I know this isn't a ground lease scenario but just putting out there how chopping up the interests does not always result in evenly distributed risk.

 

[Pittsburgh Pete]

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

But they aren't getting any extra rent, despite the TI.

 

[Gobears81]

But they aren't getting any extra rent, despite the TI.

I think that there is confusion on which interest is being valued, rather than issues with methodology. I interpreted the OP's post as being the original tenant's interest, rather than the owner/ lessor of the building, but am certainly open to the possibility that the wrong assumption was made.

 

[farmers soul]

I think that there is confusion on which interest is being valued, rather than issues with methodology. I interpreted the OP's post as being the original tenant's interest, rather than the owner/ lessor of the building, but am certainly open to the possibility that the wrong assumption was made.

What i have been asked by my client is to provide the value of the leasehold improvements that are being made by the tenant. I am just trying to figure out what methodology makes sense. I appreciate the thoughtful responses!

 

[Deleted member 152047]

The answer is zero. I've tried to type out an explanation in a variety of manners, but it is difficult to explain without a detailed conversation.

I work on this stuff everyday in a TI heavy environment. It really doesn't matter what the tenant invests into the space, they will never get "value" from their investment as it relates to the real property.

 

[Raven59]

At market rent - zero