Lease Analysis

 

Appraisers analyze established leases as part of the appraisal process.  Single occupant buildings usually require the analysis of only one lease.  Multiple tenant buildings often require the analysis of a few to several leases.  Lease information is "abstracted" by appraisers or owners from the original lease documents.    

 

Appraisers consider the actual lease terms as being fixed by the lease or leases in leased-fee assignments.  Leases with established lease rates that are above the "economic rate" in the market or below market lease rates can thus positively or negatively affect the market value concluded. Importantly, the fee simple value can be different from the leased-fee value.

 

Appraisals of fee simple interests in commercial real property can, as a hypothetical condition, consider what a property value is without the influence of a lease or leases.  A reasonable assumption can at times be made that the lease rate(s) will increase or decrease after a lease expires and that the newly established lease rate will become equivalent to the "economic" market rate.  Since lease rates are now beginning to fall for some property types, it is also reasonble to assume that future lease rates will follow market trends.  

 

Lease terms are generally analyzed in the income approach section of an appraisal report.  An appraiser calculated net operating Income (NOI) is capitalized using a market derived direct market capitalization rate.  Established leases are also analyzed using yield capitalization via a discounted cash flow (DCF) model.

 

Lease terms are analyzed by the appraiser during the appraisal process.  Important in the analysis are; the length of time the property is leased (in months or years), optional renewals, the base rental rate, rental increases (often adjusted based on changes to the consumer price index - CPI but sometimes fixed) and the ability to sub-lease.

 

The determination of anticipated vacancy rates also plays an important part when leases are analyzed.  With Office vacancy rates approaching 25% in Las Vegas in 2010, an appraiser must consider whether lease renewals with bring lower returns or vacancy.  The strength of existing tenants must be assessed, even major corporations may not be reliable tenants in the curent economic atmosphere.  Thus, leases with above market terms and questionable tenants are given considerably less weight for continuation than leases with typical terms and excellent tenants.  The risk and the durability of the income stream are important considerations for appraisers, and it has become increasingly more difficult to analyze these factors.  

 

Contact us with your questions or concerns regarding the analysis of leases or regarding your specific appraisal assignment in Nevada at 1-702-568-6699.  We can also be e-mailed at grigdon@cox.net.  

 

 

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Commercial Real Estate Appraisals in the Las Vegas & Henderson, Nevada Area.