valuing a property rented below market rates

[Michigan CG]

Industrial property, encumbered by a ten year lease, and then a reversion?

My initial thought is capitalize what you are going to get for ten years, you can't value what you are not going to get, and the reversion of an industrial property is highly speculative for many industrial properties (that I am familiar with) depending on its use, location and potential future users.

PE has a great response....I am just posting my initial thoughts.

Future posters can send me a bill for educating me.

 

[Fred]

Steven .. I just have one question for you if I may.

How can I stop you? You already asked?

While I agree with you that actual could be capitalized with the PV of the reversion added, wouldnt you have to have other sales which were leased at below market rates in order to develop your cap rate?

I appreciate the theory behind what you are suggesting. However, is the relationship of contract to market the only variable that determines the quality of the income stream? I don't think so. For lack of better terminology, an above-market rent could still be a "Class-A" income stream deserving of a Class-A capitalization rate, while a below-market rent could be a Class-C income stream.

 

[PropertyEconomics]

How can I stop you? You already asked?

I appreciate the theory behind what you are suggesting. However, is the relationship of contract to market the only variable that determines the quality of the income stream? I don't think so. For lack of better terminology, an above-market rent could still be a "Class-A" income stream deserving of a Class-A capitalization rate, while a below-market rent could be a Class-C income stream.

I appreciate your post Steven. I always learn from you. Thanks again.

 

[Valuation75]

Here is how to do it:
1. Appraise it under market terms
2. Produce a direct cap, sales, cost, and DCF under market terms
3. Derive the present value of the lease
4. Then "line item" the lease value under the concluded values of each approach, this will provide your leased fee value.

 

[PropertyEconomics]

Here is how to do it:
1. Appraise it under market terms I assume you mean using Market RENTS ... correct?
2. Produce a direct cap, sales, cost, and DCF under market terms I assume you mean measure not produce ... correct?
3. Derive the present value of the lease I assume you mean measure the present value of the income LOSS generated by the below market lease terms ... correct?
4. Then "line item" the lease value under the concluded values of each approach, this will provide your leased fee value. I assume you mean deduct the net present value of the rent loss from the value indications of each approach ... correct?

Just wanting to make sure we are all on the same page here....

 

[Valuation75]

ProperyEconomics, that is what I meant. I'm glad you are on the same page.

 

[Abester]

The Appraisal of Real Estate, 12th Edition, page 82 states, "The benefits that accrue to the owner of a leased fee estate generally consist of income throughout the lease and the reversion at the end of the lease."

 

[PropertyEconomics]

The Appraisal of Real Estate, 12th Edition, page 82 states, "The benefits that accrue to the owner of a leased fee estate generally consist of income throughout the lease and the reversion at the end of the lease."

This is a true statement and is applicable in both direct capitalization and discounted cash flow analysis, but doesnt directly address the below market lease rate as identified by the original poster.

 

[Abester]

Yes, yes it does.

 

[PropertyEconomics]

Yes, yes it does.

Ok .. I concede that point .. let me put it this way .. the statement does not address the means of valuing the below market lease rate over the term of the lease in a fashion sufficient to suggest any methodology.