AboutMike Fortunato Expertise Can answer questions on all aspects of commercial real estate management, including lease administration, eviction issues, financial reporting and budgeting, asset valuation/enhancement, marketing & leasing, and site maintenance and repairs. 20+ years of real estate management.
Experience 20+ years in commercial management. Current own and operate property management company in southern California.
Question QUESTION: I work for a non-profit who received a portion of a land lease donation through a trust. Our portion generates $1776.60 monthly income and goes through 2044.
I can calculate the present value using some assumptions, but is there a premium or discount on the land lease present value?
ANSWER: The only adjustment you might want to make is for an annual inflation factor for the period from now until 2044. Problem is, inflation is all over the map right now....in fact, the last few months the Consumer price index actually declined, signifying no inflation at all. Yet many are predicting hyper-inflation for future years due to all of the government actions, and the likelihood that the dollar will be devalued even more. Very difficult to predict at this point in time.
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QUESTION: I can make the inflation assumption, so I do not need that information. My main question; is the land lease worth more or less of the calculated present value using the numbers previously given? So if I receive $1776.60 per month for the next 35 years at no interest on the money, it will accumulate to $746,172. If I sell the lease today, is the land lease typically discounted from the accumulated cash flow stream? What would be a typical offer be for a this land lease?
Answer There's not enough information to determine that. For instance, the value of the land lease is affected by the risk associated with the tenant. If the tenant defaults, then of course the lease is worthless. Since there's almost always a perceived risk of that possibility, the cash value of the lease will probably be less than the lease value. By how much, depends on the financial strength of the tenant. Also, does the lease include annual escalations? (it would be unusual for it to be a flat amount for that long of a period of time). If not, then the cash value would be even less.
