Valuation of Multifamily Property with Leasehold Interest - Advice Needed
What is the best way to value a multifamily property with a ground lease? / What is the best way to value a multifamily property with a positive leasehold interest (market rent is greater than contract rent)?

Is there a more simple way (back of the envelope kinda way)?

I've seen online about calculating the present value of the ground rent cash flows and adding that to the value calculated by capping the NOI (NOI less ground lease payment), but want to confirm that and see if there's something simpler since I'm not an appraiser.

Thanks!
[{"id": "hre3ada", "text": "There is absolutely an easy and simple way to value this property. Hire an appraiser and they\u2019ll do it for you.\n\nYou could attempt a quick and dirty formula such as Value = Income divided by Rate. You probably won\u2019t be very accurate but it could get you in the ballpark.\n\nMost importantly, why do you need to know the value?", "replies": [], "depth": 1}, {"id": "hred2az", "text": "Cap the NOI excluding land rent like you would for any typical property.  Then add the PV of the annual land rent net benefit.", "replies": [{"id": "hreszhi", "text": "Now that I'm thinking about this more...should the NOI be capped at a higher rate since you won't own the land?  Normal cap rates are a blend of a low rate for the land and a higher rate for the building.  Unless your cap rate comps are all on land leases as well.\n\nI'd probably put everything into a DCF and see how it shakes out.", "replies": [{"id": "hrf7gq6", "text": "It really depends on how much time is left on the lease. If there's 99 years left (or lengthy renewal options), the tenant's interest at market rate is virtually fee simple and a market cap would be appropriate. If there's 5 years at market rate, a higher cap rate would be required.\n\nHowever things get complicated with OP's below market rent, since one way to compensate for a shorter-than-market term is through reduced rent.\n\nReally the best was to deal with it is DCF. And modeling ground leases is generally not terribly hard, especially if there's no percentage rents.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hrevmqc", "text": "Its complicated... Definitely talk to an appraiser, but also talk to a lender. \n\nYou won't get A+ rates for anything with a land lease, so the higher cost of debt would also need to get factored into the valuation. Land lease properties are also tricky because you may not be able to get financing depending on the amount of time left on the lease term. Also the strength of the lease, its entitlements, and any other provisions also factor into the value.", "replies": [], "depth": 1}, {"id": "hrf63g3", "text": "I\u2019ve never heard of a positive leasehold interest - presumably since you don\u2019t own the dirt the PV of the ground lease would have a discount rate equal to your going in cap rate? I\u2019ve also never heard of a \u201cmarket rate\u201d for ground leases - they\u2019re all pretty asset specific to create synthetic leverage for an owner. Like\u2026 are you getting paid money by the owner of the dirt? If so how did that happen??\n\nThat said you\u2019d value the asset as a standard DCF on your cash flows over your hold; I\u2019d also suggest that when sizing for debt you look at NOI net of ground lease payments which is how lender will look at it. I also don\u2019t think the agencies will lend on ground lease land so consider that. \n\nI\u2019d also apply a much higher discount rate to your DCF and a high exit cap rate, outside of NYC and London there\u2019s not much liquidity for ground lease deals - will be really tough to sell, the only people who show are bottom feeders in my experience.", "replies": [{"id": "hrhi1e1", "text": "I'm valuing the property for work to come up with a reasonable LTV and the original appraisal had calculated a positive leasehold interest because of the below-market rent ground rents, so I think that was confusing me in how I should approach it (this is NYC). Ignoring that factor and conceptually speaking, looking for the best way to value a property that has a ground lease.", "replies": [{"id": "hrhoth8", "text": "Just unlevered DCF with an above average discount rate and higher reversion cap - should be data out there on NYC ground lease trades to get the cap rate spread between fee simple and GL as well as unlevered return spreads between the two", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hrf9x5p", "text": "MAI appraiser here at your service who has handled his fair share of weird property rights situations on GL\u2019s over the years. My very first question is how many years are left on this GL (including market based options). Suggesting you have 25-30+ years left on the ground lease, most appraisers are going to deduct the ground rent as a gross expense in a direct cap, apply ground rent as a gross expense in a DCF as the lease would indicate it, and make reasonable adjustments to sales comparables that are not encumbered by a ground lease. Now where this would get really messy will be if you have less than about 25 years of ground rent term. You really need to hire an appraiser or have a well versed broker in this type of property rights give you an opinion here as a lot will depend on the language specific to the lease. A lot is going to depend on the residual situation when the clock hits 0 on that ground rent. \n\nOn the positive leasehold opinion (I am assuming you are talking about a positive leasehold in the market rent paid by renters not the rent paid in the ground lease here), most appraisers are going to consider a positive leasehold either in a below the line PV or within their underwriting of vacancy, cap rates, etc. This gets tricky as the biggest thing on the appraisal side is not double counting a positive or negative leasehold with other assumptions (market rent, vacancy etc.). There is no perfect answer here and I tend to personally rely a bit on my sales data and the underwriting they have to determine where I want to make a positive or negative leasehold adjustment if that makes sense. 2 appraisers could choose to apply this differently and neither is necessarily wrong (and hopefully both methodologies lead back to a similar number).", "replies": [{"id": "hrfcxa6", "text": "Thank you! I probably should have mentioned this but this is really a conceptual question for me, as I am valuing a property for work with these characteristics and want to make sure I am doing it in a reasonable fashion (with no expectation of it being as detailed as a traditional appraisal). We just want to reasonably calculate LTV at the end of the day. \n\nGround lease expires in 2111. For the next 26 years it increases 2.5% until 2048 when it is reassessed at 6% of the land value. Are you saying I can do a direct cap and if my NOI is net of the ground lease payments, that would be my leasehold value? That would be simple enough but I suppose it does not incorporate the increasing ground rents. I had been thinking of calculating the present value of the actual GL payments through 2047 (would need to figure out an appropriate discount rate though...30 year Treasury is about 2.07 then what is my risk build up?) and subtracting that from the direct cap value (NOI before GL rent). Does that make sense? \n\nAppreciate your input!", "replies": [], "depth": 2}], "depth": 1}, {"id": "hriiy60", "text": "You need:\n\n* Fee Simple Interest appraisal\n* Lease Hold Interest appraisal\n* Fee Interest appraisal\n\nThese transactions are complicated.", "replies": [], "depth": 1}]