Value long term land lease where hotel straddles the land

[PaulTW]

I've been asked to appraise a hotel property land lease. The lease is over 40 years old - with twenty more years to go. The hotel owners own the adjoing property - and the 10 story hotel straddles the two parcels. The owner of the hotel has offered to buy out the lease at a ridiculously low amount. The owners of the lease are not motivated to sell - unless they are offered a reasonable amount that includes the value of the improvements (the portion straddling the property). The lease states that an the end of the lease any improvements built will revert to the land owner.

So to value today the remaining income of the lease under reversion + the % value of the improvements?

Any examples, thoughts?

Paul

 

[Gobears81]

The valuation would reflect the present value of the income due (or projected) during the remaining 20-years of the lease term, as well as the present value of the reversion.

The reversion would reflect the value of the land and any improvements on the tract at that time. What is the effective age of the improvements? It is common to recognize no or nominal value for the improvements at the expiration of the land lease, though in practice, that does not always manifest. What I've seen happen in some cases is that the leasehold owner realizes that they will lose use of the building that has value at the end of the land lease, and will stop performing repairs/ updates for several years. As a result, the (former) land lessor often takes over a building with deferred maintenance that may or may not have value upon lease expiration.

 

[PaulTW]

Built in 1986 - 11 story 278 unit hotel - well maintained - probably effective age of 20 years. The portion of the hotel building on the land is probably about 60%. To confuse it even more - there is an adjoining multi-story garage - that you have to traverse the property to access.

 

[Gobears81]

Built in 1986 - 11 story 278 unit hotel - well maintained - probably effective age of 20 years. The portion of the hotel building on the land is probably about 60%. To confuse it even more - there is an adjoining multi-story garage - that you have to traverse the property to access.

The leasehold owner would probably be resistant to do any significant P.I.P. with less than 10-years remaining on the lease term. You know the property and market better than I, but it sounds like a strong candidate for recognizing land as the reversionary value.

 

[Red Flint]

Spend time in the market and use analyses. Risk is lower for a land lease with 20 years to go and 40 years of payment performance. Risk is higher for depreciating improvements returning a steady income to the land. What is the land worth? What is the state of the triple net lease market including sales? Are there similar land lease sales (can go back in time for a while if comparable). These kinds of questions supply answers that feed into the valuation approach(es).

Also consider value definitions and property rights. Market value (to many) may not reflect investment value (to one). Fee simple, leased fee, and leasehold rights should be partitioned and compared, even if only in mental meandering.

 

[PaulTW]

Part of the problem is that the hotel building straddles the property - about 60% of the building is on the land. How do you carve that up - just simply 60% of value of the improvements?

 

[Red Flint]

Part of the problem is that the hotel building straddles the property - about 60% of the building is on the land. How do you carve that up - just simply 60% of value of the improvements?

There is likely complication rather than simplicity.

Start with the land legal descriptions, measure the building, place it on the land. Glean everything you can from the lease clauses and deed records. Study the assessment, how was this arrived at, how was the taxation handled for the property?

There may be more than one valuation method to address a (hypothetical) vertical plane through the land upwards to the roof. Hypothetical conditions have their own risk, and need investigation to determine the plausibility of the technique. Dive in.

Hotels are difficult properties to appraise because, like a golf course, the personal property and fixtures comprise an essential element to the enterprise, and should be valued and partitioned. Additional work is done to evaluate business value, completed differently by CPAs (better) and appraisers. Franchise fees likely apply. Want multiple valuation approaches for this type of property, and either a paid subscription for data or sufficient files in your pocket to be credible.

 

[BRCJR]

It will have little to no value if the hotel operator just shuts down. The A/C, H2O, electric, etc. etc. can all be shut off. What does the reversion do for the lessor then?

Which part of the property is the front desk located in? Where is the energy management panel? Where is the elevator? Where is the food service operations?

I could make an argument the portion of the hotel that reverts is a liability.

The lessor will need to carry some form of insurance and pay taxes on their portion, at a minimum.

A buyout is the only true solution, I believe.

Now to value the portion under lease to include the value of the reversion.

Good luck!!!!!!