Why Building Value Continually Increases in Buildings with Flat Leases
The question is often raised as to whether sales prices of GSA-leased buildings will reflect the increasing intrinsic value of a building even though GSA leases in general have essentially flat base rents. Without going in a lot of detailed calculations for example, Epic Consulting's specialized data collection over a 10-year period (2005 to 2015), revealed that for office buildings with over 30,000 rentable square feet (RSF), in which at least ninety percent of the property was devoted to the overall leased office space, the increase was about three percent per year on the overall net operating income (NOI).
GSA does not maintain as part of its leasing database the sales price of GSA-Leased buildings upon transfer of ownership. Such information is typically regarded as confidential on the part of buyers and sellers. It is proprietary on the part of the brokers and lenders, too; therefore it is not readily obtainable.
Even though base rent is constant over the term of the lease in GSA-Leased buildings, this does not mean that the building value stays constant over the term of the lease and then jumps to market value when a subsequent lease is put in place; if this were true, virtually no one would sell property between lease renewals and sellers would wait until such renewals took please.
The economic value of any income-producing asset is the cumulative sum of the annual cash flow benefit's over the remaining asset's remaining useful life, starting with current year. As a practical matter, a good short-cut formula for estimating increasing building value during the course of a GSA-lease is to capitalize the net rent at whatever the current cap rate is for a particular class of real estate, and then apply an annual inflation rate of three percent or so as indicated from data.
This would come very close to the prices sold - even though the net rent of any given buildings or realized sales prices for buildings sold - even though the net rent of any given building during its lease term has not changed at all under the terms of the GSA lease.