Ask Henry

Value of Lease

Dear Henry,
     If I lease some farmland to a farming family for 99 years, how do I calculate the value of this lease? Is it just a discounted cash flow plus the reversion of the land? Or does such a long lease typically include return on and return of capital and the reversion has no value? No buildings are involved in this deal. Thanks in advance for your help.

Don
apps1@compfxnet.com

Dear Don,     For all practical purposes, a 99 year lease is a sale. It is not the original lease date that counts ~ it is how long the lease has to run.  Some states prohibit leases longer than 99 years and others say they are the same as sales. Trying to discount income for 99 years into the future, and then trying to add the present value of a reversion 99 years in the future results in a meaningless figure. Should you consider global warming (aka climate change) or that the population of the world may be 10 billion people or may be zero?  Some appraisers take the position that some small number is needed to reflect the difference between such a lease and ownership.  My problem is that I don't know whether it should be a plus or minus adjustment.  In most condemnations I am familiar with, a very long lease is treated as a sale.

HSH
askhenryharrison@revmag.com