Anyone know if there is a rule of thumb for determining how much ground rent should be on a retail property? I'm looking at an empty retail lot that the owner wants to keep with a ground lease on it but is willing to sell any retail improvements. I'm trying to get an idea of what the ground rent should be given that I know the approximate construction costs, retail rent, and operating costs. I know what I can afford to pay based on my DSCR, but curious if there's a guiding principle.
Is there a "% of revenue" rule of thumb, or, like, I don't know, a "% of NOI" rule of thumb?
The rule of thumb I've always looked at is 20% of NOI, per lender feedback. Obviously the lower the better, but that seems to be the lender threshold.
You can also just goal seek your ground rent as a stabilized annual operating expense, and see how high you can do to hit the lowest stabilized yield you can live with
We did a recent deal for a large retail center in Hawaii (quite a notable center too) and the ground lease had the operator paying 7% of the property's appraised fair market value (land + property), increasing 15% every 5 years for 99 years -- and every 30 years, the property was to be reappraised.
Let's just say the Ground Lessor got the better end of the deal, because nearly 50 % of the operator's OpEx was the ground rent.
This is typically how I've seen it done. You (an appraiser/independent broker) set a FMV of the land, then usually it's a % return on that. 7% seems high to me given the interest rate environment, I've seen anywhere from 4-6% depending on location, term, etc. Then usually as mentioned above it's fixed for quite a while and resets every x years with a fixed % increase and one or two FMV resets along the way. A lot of times there will be a max/min clause as well that dictates the increase/decrease at the reset intervals.
Exactly.
Avoid FMV resets at all costs. If its a must, make the uses for the FMV reset calculations as specific as possible to avoid disaster rent hike scenarios.
Voluptatem consequuntur beatae quae quidem ullam qui et. Aut non provident dolor enim dolorem.
Doloribus nam autem ut ex voluptas est dolor. Doloremque exercitationem est et et rerum. Numquam beatae et quia quam cupiditate consectetur non. Occaecati tempore voluptatem aut laborum eligendi.
Quidem nostrum non et. Corrupti doloribus ut commodi iure. Voluptatum animi est et ipsam commodi dolorem consequuntur. Doloremque ullam in iure dolor modi ratione laudantium. Dolores minus necessitatibus inventore voluptatem provident et deleniti.
Ut similique magnam quibusdam voluptatem nesciunt voluptas praesentium. Omnis facere qui voluptatem maxime.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...