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Valuing A Leasehold...

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robertwessel

Freshman Member
Joined
Mar 4, 2002
Professional Status
Certified General Appraiser
State
Illinois
Have a client who is being evicted via eminent domain. Would like an estimate of value of the balance of lease - 30 months. I don't yet know if the current lease is at, above, or below market. Anyone have a sample report they'd care to share?
 

Richard Carlsen

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
I'm not an expert on income property (in fact I don't do income properties anymore) but I would think this would be a straight forward appraisal of the leasehold value whereby you determine through market analysis of other similar rentals and come up with a fair monthly rent.

The leasehold value should be the same as his possessory interest which is in fact, the fair monthly rent of the place.

At least that's the way I see it.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
Get a copy of Kinnards "Income Appraisal". It goes into detail as to leased fee, leasehold, etc from a commercial viewpoint. Should give you some help.

Roger
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
Robert,
Sharing reports may violate confidentiality, but I have done a couple of these. First, there is little likelihood that a tenant has a valuable interest with only 30 months to go on the lease.

This is a DCF appraisal.
If market rent is greater than contract, your client "owns" the difference he/she could earn from sub-leasing for 30 months (less rent-up, TI, vacancy, overage clauses, etc. or any other item that would reduce the gross rent differnece). Also, the lease itself would have to permit sub-leasing and you better check for a "condemnation clause." As you can see, the difference between market and contract would have to be large for any cash flow to inure to the leaseholder.
If market is equal or less than contract, then the value of your client's ownership is zero or negative.

The scenario that might generate a large enough rent gap for your client to have an interest is if the leasehold is for the land only. Then the difference between the ground rent that the leasholder pays and the market rent he/she could receive for the ientire property may be great enough to create some value. All the ones I did were like this. The government was taking back the remaining term of a land lease - and the remaining lease terms were over ten years. In discounting, the early payments count more so any vacancy or rent-up period for the assumed sub-lease chopped off the front end of the cash flow stream is going to drive the value down a lot. So, with only thirty months on the lease...
 

EDWARD BERRY

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
Arkansas
FIRST, check the lease, some have a clause on ED.

Also, check the the state (or Fed) laws.

Then follow replies.
Good Luck, ed
 
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