Pricing a 99 year ground lease
Can anyone give me a realistic pricing strategy on a 99 year ground lease for apartments?
[{"id": "fdtioh9", "text": "Assuming you\u2019re talking about the \u201cleased fee interest\u201d (the \u2018landlord\u2019 of the ground lease agreement), you\u2019re looking for the net present value of the contractual ground lease payments over the term. Take the sum of all annual payments and discount them at the appropriate discount rate (depending on risk/required yield for an investor). This can be modeled in Excel using the NPV formula", "replies": [], "depth": 1}, {"id": "fdtwxjv", "text": "Can you be more specific? Are you looking for what the lease payments should be? What the leased fee interest should be valued at? \n\nEither way, you will be best off using comparative rents. If you can access CoStar, you should be able to find data on similar ground leases in the area and go that route of market data approach.\n\n\n If you don\u2019t have CoStar, then you probably aren\u2019t a broker, which means you should contact a broker, who should have CoStar access.", "replies": [{"id": "fdvd0k9", "text": "Good luck finding rent comps for 99 year ground leases", "replies": [], "depth": 2}], "depth": 1}, {"id": "fdug5ms", "text": "Are you buying something that currently has a 99 year ground lease?\n\nIf you are trying to value the property, you would create a proforma with all incomes and all expenses and carry those out for 99 years. You would escalate rental income and opex by an appropriate percentage, like 3% per year. Be sure to include capex reserves, property taxes, and any other expenses as well, like special levies from municipal governments. The net operating income is the number you seek. You would then value the property using what is called the discounted cash flow method, where you would discount all 99 years of cash flow to zero using a relative discount rate - generally a weighted average cost of capital, or return threshold, but could be anything you choose. This resulting NPV is the value today of all 99 years of cash flow. It would give you what you are willing to pay in order to purchase the 99 years of cash flow from the building.\n\nAll of that said, usually an investor will define a holding period of 5-10 years. A savy investor would look to IRR, YOC, COC, and other return metrics over this hold period, along with a disposition value, to determine the viability of the project.", "replies": [{"id": "feeyuwf", "text": "&gt;percentage\n\nWhat do you do for work? Where would you recommend I learn all of this stuff?", "replies": [{"id": "fefch4t", "text": "I was a commercial banker for a few years and now work for a very large developer and property manager. \n\nI am still a novice, but it comes with time, tbh. you can look at ACRE on YouTube for some help with modeling. I have a finance undergrad and MBA, so my education helped, somewhat. Most stuff you learn on the job.\n\nPM me and I\u2019ll send you some books I have read and channels I have learned quite a bit from over the years.", "replies": [{"id": "fefd347", "text": "Pm'd! Thank you!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fdvtmni", "text": "Can you please provide more clarity on the following: \n\n1) Are you buying a property with an existing (or tbd) ground lease or are you looking to be the lessor? \n\n2) Which market is this in? Is this a new construction project? How large is the asset? \n\n3) When you say pricing are you referring to the lease payments or the size of the ground lease? Regardless, a good starting point would be an initial payment of 4% with 2% escalations and a CPI look back. The leased fee interest should typically be 30-40% of the fee simple value and account for no more than 25% of the property\u2019s NOI.", "replies": [{"id": "fdymcop", "text": "We are looking at an offer for a 99 year ground lease with a developer that wants to build apartments. \n\nThey made a sales offer and 99 year ground lease, but the question i'm trying to figure out is if the 99 year ground lease is worth more than the sales offer. \n\nStarting at $20k/mo + NNN with 10% bumps every 5 years.", "replies": [{"id": "fe9gq5m", "text": "What\u2019s the sales offer? Also, keep in mind that if they are developing there is a certain amount of construction risk.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]