Let's assume we are looking at primary market CBD office (NYC, Boston, LA, SF, etc).
Assuming a leasehold interest with at least 50+ years remaining and fixed rate increases, what type of cap rate discount would you peg for leasehold vs fee simple?
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I'd say +/-50bps that seems to be the norm.
While it would depend on how large the leasehold payments are (generally calculated as a % of Revenue or NOI), I would second this opinion.
There many other aspects too, but as a general rule of thumb, 50bps is a good start.
Agreed. I'd say about 50 bps. In a market with high scarcity of supply, maybe 25 bps. But yeah, in general, about 50 bps.
Any market data to validate this general rule of thumb? Currently looking at leasehold property in the Phoenix market where the broker has advised of a 50bps discount. Just been tasked to find some data points in the market to corroborate this - any further insight on this would be greatly appreciated!
To add to his question, in a tertiary city, could the spread ever go north than 100bps? Thanks in advance.
A lot depends on the lease, as others have said. Lenders generally like at least the amortization period of the bond remaining on the lease at sale (i.e. 30 years of term for a 30 year amortization), and even that is pushing it. Additionally, you've got to present value the ground lease to come up with an implied leverage - a ground lease is basically just another form of financing. If you're too highly levered, it's tough to get financing.
In a vacuum, leasehold assets trade approximately 100 basis points higher than fee interest deals. You will lose a significant amount of the buyer pool if you are selling the leasehold.
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