The writer of this article talks about the Discounted Cash flow Analysis, comparing its effectiveness as a means for the valuation of leased fee interests that accrue from long-term leases with other available approaches. He bases his action on the condition that the leases use a rate of payment which varies over the lease's life and the information on sales of similar leases is non-existent or inadequate (Boice, 1999).
Using an example of an appraisal task requiring valuing of the leased-fee interest that results from a long-term ground lease under a motel, Lane Boice is determined to compare the use of a discounted cash flow based on variations in the Consumer Price Index and the use of direct capitalization that bases on the subject lease's current rent together with a capitalization rate (The Appraisal Institute, 1998). Factors such as improvements made to the property and age were put into consideration.
Boice (1999) asserts that following the discovery that there was a difference in the outcome from the two methodologies, two articles, namely 'Valuation of a Leased Fee Interest' by Thomas Rodgers and 'Valuation of Long-Term Leases' by Robert N. Jones and Stephen D. Roach which were studied were published in the Appraisal Journal. These indicated that a discounted cash flow analysis was appropriate for valuation of both aspects. Apart from situations that involve very long-term leases and flat, fixed rates, use of income capitalization to value a leased-fee interest is incorrect.
Lance Boice's national data search did not bear any fruits. Applying the most suitable discount rate is dependent on logically taking into account the probable risks to the leased fee status taking the Treasury returns as a yardstick for adjustment. This is to imply that in valuing leased fee interests, the discounted cash flow analysis is the most appropriate tool (The Appraisal Institute, 1998).
