valuing a property rented below market rates

[associated]

Please advise the proper way to value an industrial property encumbered by a ten year lease agreement, which is the second option renewal period, that is rented below market rates for federal estate tax purposes.

 

[Fred]

Please advise the proper way to value an industrial property encumbered by a ten year lease agreement, which is the second option renewal period, that is rented below market rates for federal estate tax purposes.

Capitalization?

 

[associated]

Since the property is leased (NNN) for a stablized annual rent, should the direct or discount cash flow capitalization method be utilized?

 

[associated]

below market rental property

Since the property is leased (NNN) for a stablized annual rent, should the direct or discount cash flow capitalization method be utilized?

Since the property is leased (NNN) for a stablized annual rent, should the direct or discountee cash flow capitalization method be utilized?

 

[Mike Boyd]

I'm not an AG but I would think you would use MARKET rents rather than actual rents.

 

[Fred]

I'm not an AG but I would think you would use MARKET rents rather than actual rents.

And why would you want to perhaps cause your client to pay tax on something they won't receive?

 

[Mike Boyd]

Who is the client? Is it the owner?

You're probably right since I am a lowly AR.

 

[Abester]

The owner gets two things:

The cash flow for the remaining lease term plus options since, if it IS below market, the tenant is likley to keep it.

And

The reversion...

 

[Restrain]

You have a leasehold value to the lessee since he's getting it below market, over the period of the below market lease. Take the contract rent, since that's what you're contractually tied into, and consider the probable holding period of a commercial property. If the below-market rent expires, then you can equalize out the rent for the remainder of the time frame.

 

[aussie ken]

I'm not an AG but I would think you would use MARKET rents rather than actual rents.

From down under I agree......