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GROUND LEASE ANALYSIS <br />The purpose of this section is to estimate the annual lease payment to the ownership entity <br />given the subject's maximally productive use. Please note that this analysis is from the <br />owner's perspective and assumes the land lease would be long term in nature, which would <br />limit the impact on value. <br />To estimate the annual gross income from a ground lease, rate of return analysis will be <br />relied upon. Rate of retum analysis establishes a lease rate based on land and improvement <br />value by applying market-derived rates of retum to these components. Generally, separate <br />rates are quoted for land and improvements, with typically a higher rate of return required <br />for improvements than for land. This recognizes that improvements are a depreciating asset <br />and require replacement in the future. Once the rates are determined they are applied to <br />the estimate of value attributable to the subject's land and site improvements to <br />approximate the annual lease payments for each of the five development scenarios. In <br />addition, the estimated cash flow from an interim parking use is calculated and compared <br />to the development scenarios. <br />The owner's of the subject property intend to lease the ground and site improvements to a <br />developer, generating an annual revenue stream. This section examines each scenario <br />based on revenue generating ability and reports an annual ground lease payment. <br />To estimate the annual gross income from a ground lease, rate of retum analysis will be <br />relied upon. Rate of retum analysis establishes a lease rate based on land and improvement <br />value by applying market-derived rates of retum to these components. Generally, separate <br />rates are quoted for land and improvements, with typically a higher rate of return required <br />for improvements than for land. This recognizes that improvements are a depreciating asset <br />and require replacement in the future. However, the subject's improvements consist of a <br />concrete parking structure and concrete building pad. Given the long-term viability of these <br />irnprovements, the same rate of return will be applied to the land and improvements. <br />The most typical rate of return required is 10%. The following chart shows the estimated <br />annual ground lease payment for scenarios one through five, along with the estimated net <br />cash flow from an interim parking use. <br />Z Includes annual income of $16,000 from lease of remaining 32 parking spaces not utilized. <br />P99239 PALMER, GROTH 8~ PIETKA, INC. 40 <br />