Lease valuation question

[Peter Lee]

Anyone have opinions on what would be an appropriate discount rate to apply to a lease valuation?

Subject lease is a new, 30 year lease for a 15,000 sf building with Walgreen's as a tenant.

Comments appreciated.

[Joel Owens]

Hi John,

What exactly are you trying to do??

Usually Walgreens and CVS are not signing 30 year primary term leases. If anything they are going from 25 year to 20 year due to the new FASB accounting rule changes coming soon.

The value of a Walgreens will be tied to it's primary lease term remaining and then demographics of the area and land it sits on with traffic counts. Higher estimated traffic counts generally drive higher estimated annual sales for Walgreens at that location and they are willing to pay higher per sq ft to be there.

Is this a stand alone building or connected or part of one loan on a large shopping center? If it's stand alone that is different from being tied into the other properties as a whole for a purchase.

As the years wind down especially under 10 years left on primary lease term then the cap rate starts rising heavily. This is due to needing mainly an all cash buyer or someone who wants almost no cash flow. The lenders do not count the option renewal periods so you are taking a chance the building goes dark if they do not renew. Pharmacies with ten years left in primary you can still land good debt on and have numbers that work before the options kick in.