Buying a Leasehold multi tenant property with long lease terms
I am new to commercial investing and I am looking to invest in a property however it is a leasehold. It has 50 years remaining on the lease and it’s a multi tenant property which is not that old (&lt; 10 years). The tenants are nationally known and have multi year lease renewal options. Leasehold property is a new concept for me so if anyone who owns these type of properties would you please share your experience.

How easy is it to exit with these type of properties ?
[{"id": "gw0af7f", "text": "In retail, 1031 exchange money is king and a leasehold is not eligible for 1031 unless there are more than 33 years remaining on the leasehold. If you plan to exit in 7 years I would say the property, based on the location, wouldn\u2019t be unsellable on the exit. Another important factor is who the guarantor is on the leasehold. I hope this helps.", "replies": [{"id": "gw0c02l", "text": "Yeah, I am planning to hold it for at least 10 years since it still has 50 years remaining and then sell it", "replies": [{"id": "gwbu0q1", "text": "Cool well give me a shout if you have any other questions. I work on the sales side and focus on national net-lease.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gw0hd5i", "text": "The value of the leasehold interest is the present value of the  future rents at your chosen (or market) discount rate for rents. Know that there may be a different discount rate for rent and reversion (the value of the property when you sell it).\n\nFor a 60 year remaining term, the value between the 60 year lease and a comparable 'Fee Simple' deal shouldn't be that large, but as you approach the end of the land lease, the value of the leasehold falls. At the end of the lease, all improvements on the land become property of the owner of the land in fee simple.\n\nA short term investor may be someone trying to improve the rents and therefore present value of future cash flows. A good example is a developer who does the prepaid lease on the land, goes through zoning, builds and subleases the space on the property to the tenants. \n\nAnother investor might be interested in the future case flows, like buying a series of bonds. Maybe hoping the prevailing interest rates will fall and the present value of those future cash flows improves. Is this you?\n\nMaybe there are other reasons for other investors\n\nI think you should think about what your goals are for the property. Are you prepared to hold and collect rents until expiry, or are you going to add some value by adding rents, or tenants etc.\n\nKnow that the value of the asset will fall over time.\n\nEdit: Various grammar", "replies": [{"id": "gw0jclg", "text": "I am planning to hold the property for the next 10 years at least and collect rent, use the proceeds to invest in other properties and build my portfolio. Depending on how to market is 10 years from now, I might sell or hold on to it for the long term. I understand that the value of the property will decrease as the lease term get closer however based on the current NOI, the ROI is &gt; 25% on this property.", "replies": [{"id": "gw0l1ao", "text": "I'm so curious. If love to know more.", "replies": [{"id": "gw0mawf", "text": "I think with 50 years left on the lease, you will find a buyer in 10, but it might take longer to find a buyer than similar fee simple deals", "replies": [], "depth": 4}, {"id": "gw1s4r0", "text": "I know right?? I have never seen a leasehold with credit tenants with that kind of return.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gw41g11", "text": "that is a SERIOUS ROI for the property. Almost sounds too good to be true. I would read through the leases and pay attention to any potential escape clauses in them or any possible landlord responsibilities. Based on the long term, you are probably okay (selling in 10-15 years with 45-50 years remaining on the leasehold). As the time period becomes less and less, expect the CAP rate to go up and the value you can sell it for to go down. Good luck on this. Here in CA a fee simple deal would sell for 4-5.5% CAP whereas the same deal on a ground lease would sell in the 7.5-8.5% range (rough estimations as all tenants are different).", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gw0kwxg", "text": "If values rise your asset will be the lowest of the bunch.  Over and over again.", "replies": [{"id": "gw0ll0p", "text": "I apologize, it might be a dumb question but what do you mean by values rise. I understand the value of the property decreases the longer I hold on to it but as long as the property is leased I will be having a healthy cash flow and once the property is paid off it will only increase the cash flow further, is there anything that I am missing.", "replies": [{"id": "gw1g3ao", "text": "If you take a look at areas with both leasehold and freehold over the past 10 years, the freehold assets have more than doubled in value while the leaseholds have increased maybe 20%.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gw114o9", "text": "There can be two leasehold positions. 1) you ground lease the land then lease the improvements to various tenants. 2) you provided the tenants a significant TI or contract rents are well above market so you hold a positive leasehold position. In this case, it sounds like you are ground leasing the land. \n\nExiting depends on who you ground lease the land from. I worked on a shopping center that was ground leased from an airport authority and exiting is difficult b/c the airport authority also has to approve the sale/buyer. \n\nRegardless, since you don\u2019t own the fee simple interest in the land, there\u2019s another party involved and there will likely be more hoops to jump through to dispose of the asset. As a lessor, I would want to know the credit and financials of the new lessee, where this wouldn\u2019t be a consideration if you owned the land outright.", "replies": [], "depth": 1}, {"id": "gw1b86i", "text": "I would be worried about the term of the Ground Lease at the tune you sell. Who is going to pay full price for a building they will have to surrender in 40 years? In my experience once you get below the 50 year mark on a ground lease, the value takes a hit because your exit cap rate will fall like 100 bps for every 10 years after you reach that period. \n\nUnless you are comfortable making almost no money in residual, and your investment spits off enough cash to get your equity and returns, I would think twice about buying something on a ground lease with such little term.", "replies": [{"id": "gw1pazq", "text": "If I can negotiate a 3 5-year option on the extension on the lease, it will give me 30 years to make money off the rent and still be eligible for 1031. \n\nThe property is a retail portion below a residential apartment building.", "replies": [{"id": "gw23kbv", "text": "Understood. Just saying as long as you\u2019re comfortable with the investment with an exit sale price of $0 it should be ok. Obviously only goes for $0 if you let the lease expire, but, it is the safest assumption because with ground leased properties you have a lot more risk on the resale due to the proximity of losing the building for nothing.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gw4rkit", "text": "Honestly it depends on the market - if you\u2019re in NYC where leasehold is common, whatever people get comfortable with it. If you\u2019re in a secondary or tertiary market no one is going to want to look at a leasehold deal with limited term. Step ups can also hose you if they\u2019re greater than rent growth which in retail could be the case. The most challenging deals I\u2019ve had to sell have been leasehold interests outside of major markets - I\u2019ve had a bad time every time, will never do them again.", "replies": [], "depth": 1}]