4.7.1. Leaseholds.As in appraising a fee estate, the best evidence of the market rental value of a leasehold estate is comparable transactions—for leaseholds, comparable lease transactions.929 As the Eighth Circuit stated, “comparable sales of other leaseholds in the immediate area [a]re adequate and substantial evidence of the market value of this leasehold.”930 Generally, “the more comparable a sale is, the more probative it will be” of the market value of the property being appraised.931 Elements of comparability in leasehold valuations include the familiar elements of size, time, location, and so forth (discussed in Section 4.4.2),932 as well as the period (term) of the lease (e.g., six months, one year, five years, etc.),933 the number and terms of any option(s) to renew,934 tenant build-out,935 and the nature and extent of services provided by the lessor and/or the lessee.936 Section 1.6 notes several terms and services in government leases that often differ from those typically encountered in the market and therefore require careful adjustment. All terms must be evaluated in regard to the market rental value of the space in the open, competitive market.937 In no event can the market rental value reflect the government’s special need for the property or the risk that the government may exercise the power of eminent domain at some future point.938 

The period of the leasehold being acquired may require careful consideration. For example, as the Supreme Court recognized in United States v. General Motors Corp., if a short-term occupancy is being acquired, its market rental value may not be accurately reflected by the long-term market rental value of the same space. 939 Rather, the market rental value of the short-term occupancy “is to be ascertained, not treating what is taken as an empty warehouse to be leased for the long term, but what would be the market rental value of such a building on a lease by the long-term tenant to the temporary occupier.”940 

It is improper to develop an opinion of the market rental value of a leasehold estate based on the value of the underlying fee—that is, a percentage-of-fee value method.941 Among other problems, this method (1) does not reflect how rental rates are established in the market; 942 (2) assumes full utilization of—and payment for—all leasable space, regardless of existing supply and demand in the competitive market; 943 and (3) relies on a supposed return on value or a return on an owner’s investment, rather than market value.944 As a result, use of a percentage-of-fee-value method can lead to “gross over-valuation” of a leasehold interest.945 Moreover, federal courts have rejected percentage-of-fee-value methods even if comparable lease transactions are not available.946 In temporary acquisitions, as in permanent acquisitions, “lack of comparable [transactions] does not change the measure of compensation[.]”947 

Temporary acquisitions may be partial or total. At times, the acquisition of a leasehold estate over only a portion of a larger property may cause the diminution in the market rental value of the area not leased by the government that must be considered.948 For example, in an acquisition of a leasehold of a portion of a commercial office building, if the rental value of the remainder is diminished unless offered together with the space acquired by the government, then the diminution in rental value of the remainder would be compensable and must be considered.949 However, appraisers must take care to disregard non-compensable damage such as frustration of plans or lost opportunities.950 As discussed in Section 4.6, specific aspects of diminution in value may be legally compensable, and therefore must be considered in a partial leasehold acquisition—but are legally non-compensable, and therefore must be disregarded, in a complete leasehold acquisition.951 “By the same token, a taking may conceivably enhance the value of a residue[,]” meaning such benefits must also be considered in the remainder’s value after acquisition.952 Valuation issues in partial acquisitions, including treatment of compensable damages and benefits, are addressed in Section 4.6.