Sale-and-Leaseback of a Specialty Cold Store
A family-owned food manufacturer asks you to value its 12,000 m² cold-store and blast-freeze facility before a sale-and-leaseback. The managing director wants a figure that reflects 'what the business is worth with the plant' because the site is integrated with its processing lines and would cost $3 million to replicate the refrigeration and racking. He also mentions an unsolicited approach from an adjacent logistics group at $9.5 million, well above your preliminary market value of $8.1 million. The proposed leaseback is 15 years at $620,000 per annum, with no rent reviews, and the tenant can terminate after year 8 with 12 months' notice. The lender considering the leaseback wants 'market value' and 'investment value' in one report. The property is specialised, with limited comparable sales, and the adjacent group is the only identified party with clear operational synergies.
1. Distinguish market value, investment value, and the effect of the special purchaser in this instruction.
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Market value is the estimated amount for which the asset should exchange between a willing buyer and a willing seller in an arm's-length transaction, after proper marketing, with each acting knowledgeably, prudently, and without compulsion. It is not entity-specific. Investment value is the value to a particular investor or owner based on that party's requirements, synergies, financing, and risk profile. The managing director's $3 million replication cost and the integration with processing lines are business-specific factors; they may support investment value but cannot simply be added to market value. The adjacent logistics group is a potential special purchaser because it may extract synergies that other buyers cannot. A special purchaser's offer can be evidence of market value if it is genuine, arm's-length, and the market is adequately exposed; it is not automatically the market value. The $9.5 million approach should be verified, including whether it is conditional, how it is funded, and whether it reflects the leaseback obligations. The valuer should present market value and investment value separately, with clear definitions, and avoid blending the special purchaser premium into the market value without market support.
2. Explain how the lease terms should be reflected and how you would report the two figures without misleading the lender.
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The leaseback is not a standard institutional lease. A 15-year term with no rent reviews and a tenant break at year 8 with 12 months' notice gives the landlord limited rental growth and significant re-letting risk after the break. Market value subject to the lease should reflect the contractual rent of $620,000, but the valuer must test that rent against market rent and consider the break option, incentive packages, and potential void. If the lease is at or above market rent, the capital value may be supported by the covenant only for as long as the tenant performs; the break creates a reversionary risk. The report should show market value both subject to the proposed lease and, if instructed, unencumbered market value, but the two must not be confused. Investment value to the owner may include avoided relocation and replication costs, but it must be discounted for the lease obligations and the risk that the business fails. The lender should receive two clearly separated sections with definitions, assumptions, and a reconciliation. The unsolicited $9.5 million approach should be disclosed and weighted only after verification; it should not be presented as market value merely because it is the highest figure. The report should state that lending decisions should use the market value figure, and that investment value is entity-specific.