Thirty-seven years later, in 2012, an appraisal is ordered toĭetermine the current value of the leasehold position. Total value of the fee simple estate in 1975 was estimated to be Subsequently constructed on the property at a cost of $2,400,000. AĦ0,000-square-foot, speculative, multitenant office building was (), resulting in an annual ground lease payment of $24,000. The initial lease rate to the land was based on a 10% rate of return In 1975, the land was valued at $8.00 per square foot, or $240,000. The lease payment can never be lower than the prior lease rateĪnd can only be assumed or assigned by an entity bearing the same credit
Measurement of inflation, and the rate adjustment is applied every five The Consumer Price Index for All Urban Consumers (CPI-U), a common Lease contains a clause whereby the lease rate is tied to escalations in Theĭeveloper/lessor has a Fitch credit rating of "A." (2) The Leasing terms to be reflective of market rates in 1975. Tied to the then-prevailing market conditions. Related entity-the subject parcel for a 99-year term at a yield rate Inġ975, the owner and developer leased back to its development arm-a The case study property in a 30,000-square-foot parcel of land. That residual techniques can be appropriately applied. The analyst has concluded no intangible value was gained or lost and (1) In some cases, as depicted inįigure 1, intangible value may be gained or lost when the leasehold and However, in practice this is notĪlways the case, and an analyst must consider the issue before Value of the leasehold estate is measured in the difference between theįee simple and leased fee estates.
The income is allocated, traditional appraisal theory suggests that the Because the combined incomeīetween the leased fee and leasehold remains unchanged regardless of how Interest, if any, in the leasehold position.
The real conundrum is determining the value of a lessee's An endeavor into its value will be discussed Absent bankruptcy, and other exogenous events, the leased fee isĪ quite secure annuity. Has quantifiable implications for an interest in the leasehold estate.īoth of these lease clauses are clearly advantageous to the ground Later of these provisions creates a marketing dilemma, while the former Lessee with a credit rating inferior to that of the original lessee. Lease provision prohibits assignment of the leasehold interest to a The ground lessor (leased fee estate) from ever declining, and a second For example, in the instance of theĬase study property, a lease provision prohibits the lease payment to Ground lease provisions can introduce unique challenges when This case considers the application ofĬonventional appraisal techniques to a segment of the real estate market Nuances of the case and offer a technique to estimate the appropriate That is encumbered by an above-market ground lease payment and This article presents a case study analysis of an office building Presented to estimate investor yield expectations for types of realĮstate that are thinly traded by segmenting income and building up on
The methodology appliesĬonventional appraisal techniques while considering the various estatesĪnd how they interact with each other. The suggested valuation methodology is by no means a perfectĪnd all-inclusive treatise of the concept but one that will guide The subject of the case isĮncumbered by an above-market ground lease payment and restrictions on Leasehold interest and suggests a course of action that can be followed Lease to show the difficulties that arise in the valuation of a negative This case study examines an office building subject to a ground
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