Long Term Leasehold Interest as an Investment?

[Edward Bell]

Hi all,

I’m hoping for some guidance with a few questions about non fee simple Long term real estate investments and how they are viewed by institutional/ large real estate investors.

I’m new to this so first I want to make sure my understanding of this is correct with the following hypothetical example:

A landowner (fee owner) leases his land to a large company (with investment grade credit rating).

The agreement is NNN for 50 years with options to renew, an initial annual rent of $200,000 with periodic rent escalations (e.g. 2% year).The company makes a significant investment into the land by building various structures it needs (offices etc) on the land.

Two years later the landowner wishes to monetise this future rental income but without selling the fee ownership of the land, which he wishes to keep in the family.

He decides to create a long term (40+ years) interest (between the fee and lease agreement with the company) that he can sell to an investor. He’ll be relinquishing his right to the future rental payments (for the period of the interest) but retains ownership of the land.

Some questions:

-I’m new at this and a bit confused! What is the correct real estate term for what i’m describing here?

-Considering that what the landowner is looking to sell is, essentially, a right to receive the future rental payments for a fixed period of time, is this a scenario that a professional investor would be interested in? (Buying future cash flows not the underlying land)

-From the investors perspective, what would be the most preferable type of real estate interest (after fee simple) a long leasehold interest, easement, assignment of the rental payments from the tenant?

-What is the minimum term they would require for the interest?

-How would they value something like this? Would I be correct in thinking that they would sum the expected future rents and discount back to present?

-Given the strong covenant of the tenant, what IRR would an institutional type investor seek?

Any thoughts or experience with something like this would be much appreciated, thank you