What land valuation methodology applies in a lease-versus-sale comparison?

In a lease-versus-sale analysis, land valuation must consider the net present value (NPV) of future lease income versus the outright capital value receivable under a sale. The appropriate valuation methodology will vary depending on the structure (freehold sale vs. ground lease), lease terms, tenant quality, and market cap rates. The goal is to determine which monetization route delivers better long-term value or liquidity.

Below are the primary methodologies used to assess land value in such comparisons:

1. Capitalization of Ground Rent (Income Approach)

• Used for Lease Option
  
• Calculates land value by capitalizing the annual ground rent using an appropriate market cap rate.
  
• Formula:
  Land Value = Net Annual Ground Rent / Capitalization Rate
  
• Inputs:
  
  • Net rent (after taxes and maintenance exclusions)
    
  • Market-based cap rate (typically higher for vacant land than built assets)
    
• Best For: Institutional-grade long-term ground leases with stable tenants and escalations

2. Discounted Cash Flow (DCF) Method

• Used for Lease Option with Escalations
  
• Values land based on the present value of all projected lease cash flows, including rent escalations and terminal value at lease end.
  
• Includes:
  
  • Escalating rent over 30–99 years
    
  • Reversion value (if buildings revert to the landowner)
    
  • Discount rate reflecting land risk, inflation, and yield expectations
    
• Best For: Long-term ground leases with complex cash flows or phased payment structures

3. Comparable Sales Method (Direct Sale Value)

• Used for Sale Option
  
• Compares the subject parcel to recent market transactions of similar freehold lands in the same region.
  
• Adjustments Made For:
  
  • Location and frontage
    
  • Zoning and development potential
    
  • Infrastructure availability
    
• Output: Immediate sale value (lump sum), which is then compared to the lease NPV for decision-making

4. Residual Land Value Method

• Used for Development-Linked Sales or Lease Scenarios
  
• Calculates land value as the difference between projected development value and development costs.
  
• Formula:
  Land Value = Gross Development Value – (Construction Cost + Soft Costs + Developer Margin)
  
• Best For: Situations where the land will be developed and monetized via built assets over time

5. Lease Versus Sale Yield Comparison

• Purpose: Compares the Internal Rate of Return (IRR) or cash yield from a lease to the capital gain from a sale.
  
• Factors:
  
  • Time value of money
    
  • Tax implications (capital gains vs. rental income)
    
  • Reinvestment opportunities