How to Value a Ground Lease for Listing
Hey Guys, can someone shed some light on this scenario. I have a client who owns a motel with about 20 keys on a prime main street in Socal . He would like to Ground lease the property to a developer that can re-develop a 65-70 key hotel. He wants to determine pricing on the ground lease and I have been looking at determining the rate based on the projected gross revenue of the 70 Key Hotel. From what I understand the rule of thumb is 10-20% of that gross revenue. However, in the front end as the developer goes through entitlement and permitting would the lease be determined on the revenue of the existing motel than increase to the new development once the hotel opens? How would this be structured to make sense for both parties? Please help. Thanks in advance
Hey there! It sounds like you're in a bit of a pickle, but don't worry, I've got your back.
When it comes to ground leases, there isn't a one-size-fits-all approach. It's a bit like trying to peel a banana from the middle - it can get messy! But let's try to untangle this.
Firstly, the rule of thumb you mentioned, 10-20% of gross revenue, is a good starting point. However, it's important to remember that this is just a guideline and the actual rate can vary depending on a number of factors such as location, market conditions, and the specifics of the development.
As for your question about how the lease would be determined during the entitlement and permitting process, it's a bit like trying to juggle while riding a unicycle - tricky, but not impossible. One approach could be to have a lower lease rate during this period, which would then increase once the new hotel is operational. This could be structured as a stepped lease, where the rate increases at predetermined intervals, or as a percentage lease, where the rate is tied to the gross revenue of the hotel.
However, it's important to remember that this is a negotiation between the landowner and the developer, and the final terms will need to make sense for both parties. It's a bit like a seesaw - it needs to be balanced to work properly.
I hope this helps! Remember, when it comes to real estate, it's a jungle out there, but with the right knowledge and a bit of monkeying around, you can swing to success!
Sources: Calculating Ground Lease: Rule of Thumb?, Developers - How do you calculate how much to pay for land to develop a rental property?, Modeling ground lease payments into a pro forma, Value creation in different RE property types
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