Buying a Long Term Land Lease - Cap Rates

[Clint Gaskins]

Evening!

I am performing due diligence on a waterfront marina and retail complex in the Caribbean. The property has been in operation since the mid 1980's and has been on a renewed land lease since inception. Currently there are 44 years remaining on the lease, which is inclusive of a 25 year renewal option. 

There are 19 business on property with a flagship tenant contributing  roughly 30% of the gross income.  This same tenant controls four revenue stream on property (fuel/water/dockage/mooring balls), which their lease includes this exclusive right.  They will control this until 2025.  I value this exclusive right at about $150k in annual income.

There is also upside in a restaurant that is on property, with a lease expiring in 2021. I am a Restaurantuers by trade, so this is appealing as it can add another $200k in income to the deal.  

The seller is offering the property at an 8% cap rate, with 44 years remaining. 

The property has posted 48-53% NOI the last 5 years.

I would make assumptions the upside will continue and the operating expenses will become a smaller percentage of expense. 

Please share your advice on buying land or building leases that are profitable, as well as the applicable cap rates you are comfortable with. 

Thanks,