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To calculate the value a lease payment adds to a building, you need to use the capitalization rate (cap rate) formula, which relates a property's value to its net operating income (NOI). [1]  

Calculations 1. Determine the annual lease payment: The question provides a total lease payment of $250,000 over 10 years. 

 • Annual Lease Payment = $250,000 / 10 years = $25,000. 

2. Estimate the Net Operating Income (NOI): For the purpose of using the cap rate formula, the annual lease payment is assumed to be the Net Operating Income (NOI). The NOI represents the annual income generated by the property before deducting interest expenses or income taxes. 

3. Apply the cap rate formula: The formula to find the property value is a rearranged version of the standard cap rate formula. 

 • Formula:  

 • Property Value = $25,000 / 0.06 (6%) 

 • Property Value = $416,666.67 [1, 2, 3, 4, 5]  

Conclusion A $250,000 lease payment over 10 years, with a 6% cap rate, adds an estimated $416,666.67 in value to the building. This figure reflects the building's total worth, not just the lease's value. [6, 7]  

AI responses may include mistakes.

[1] https://www.talimarfinancial.com/how-to-value-a-property-using-a-cap-rate-a-guide-for-real-estate-investors/

[2] https://www.commercialrealestate.loans/capitalization-rate-calculator/

[3] https://askfilo.com/user-question-answers-smart-solutions/problem-set-no-1-future-value-and-present-worth-1-a-3336383832343537

[4] https://study.com/academy/lesson/the-income-approach-to-property-valuation.html

[5] https://www.chegg.com/homework-help/questions-and-answers/corporation-signs-ten-year-lease-building-present-value-lease-payments-250-000-lease-capit-q50274375

[6] https://www.linkedin.com/pulse/evaluating-sale-leaseback-strategies-above-market-rent-altshuler-zxwwf

[7] https://primior.com/how-to-analyze-real-estate-pro-forma-step-by-step-guide-free-template/

Henry McClure  
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