I'm currently modeling a development scenario where the developer would either sign a ground lease with the landlord or acquire the land for a specified price. While the legal and market value-related aspects require some further thought, I came up with an issue regarding how to model in the potential ground lease payments.
On one hand, ground lease payments (as an alternative to land acquisition) would be considered development costs and directly relate to other below-NOI items. On the other hand, ground lease payments reduce the cash flow to the property owner and thus should be taken into consideration when estimating a cap rate-based valuation for disposition. This would mean that ground lease payments might have to be considered a part of operating expenses.
So, my question to you - what would be the most optimal approach in terms of assigning ground lease payments and to deliver a "fair" valuation of this scenario? Thanks