|
|
|
Lawletter No. 151 Valuing service station master lease interests Perhaps a majority of service station sites in California are leased by the franchisor from a third party landowner. When the master lease expires, the franchisor has the right under the PMPA to terminate the dealer's franchise, as long as it meets certain other technical requirements. The franchisor has no obligation to assign any renewal options to the dealer. Some special problems can arise where the franchisor decides to close a station where a substantial unexpired terms of its master lease remains. In this situation, the franchisor must offer to assign that unexpired term to the dealer. In such cases, the franchisor is fairly likely to set an unreasonably high value on the leasehold interest, based on an unrealistic or artificial appraisal. Such appraisals should be carefully scrutinized for key legal defects. The federal Petroleum Marketing Practices Act provides that a franchisor may refuse to renew a franchise agreement on the grounds that it has decided to sell the property or discontinue marketing at the location. However, the PMPA requires the supplier to meet certain requirements when it nonrenews on this basis. The key requirement is that the franchisor must either make a "bona fide offer" to sell its interest in the property to the dealer, or afford him a right of first refusal on any purchase offer made by a third party. In most cases, it is not practical for the franchisor to offer a right-of-first refusal. (For a discussion of first refusal rights under the PMPA, see Lawletter No. 146) Therefore, the franchisor usually must meet its legal obligation by making the dealer a "bona fide offer" to sell its interest in the property to him. Value of leasehold: The courts hold that the franchisor must offer its interest to the dealer at its approximate "fair market value." Traditionally, the value of a leasehold interest is considered to be the difference between the market rental value of the property and the rent specified in the lease. For example, suppose a parcel of property would rent for $2,000 a month on the open market. Suppose further that there is an outstanding lease with five years remaining on the term at monthly rental of $1,000. The value of the leasehold is arguably $60,000, i.e., $2000 minus $1000 = $1000 x 60 months. A number of factors can increase or reduce the value. The lease may impose certain costly obligations on the tenant. Most major oil company master leases require the franchisor to remove the improvements at the end of the term. Generally, the company must also return the property to its original condition, which usually means that the supplier must clean up any soil or groundwater contamination. If the dealer must assume such obligations, the value of the leasehold interest to be assigned is reduced accordingly. Value of improvements: The franchisor's obligation to offer to sell or assign its interest in the property includes the improvements as well. The federal courts have ruled that this includes the underground tanks and lines. The only exception is where the tanks are of the old steel variety that may leak and cause environmental damage. (See Lawletter No. 83) Franchisors, and major refiners in particular, want to set the highest possible value on improvements. They are therefore likely to use whatever valuation method will yield the highest possible value. One traditional way of setting a value on improvements is to appraise the improvements and the land separately. The appraiser determines the value of the land without improvements, and its value with improvements. But this method of appraisal does not take the limited term during which the tenant will be able to use the improvements into consideration. In appropriate cases, such appraisals should be challenged. The franchisor may use a variety of additional methods of artificially inflating value. For example, the supplier may value the tanks and the building at the present day replacement cost. But this approach misstates the original cost. It fails to consider the limited lease term, as well as the potential cost of demolition or removal. Recommended procedures: Oil company appraisals of master leasehold interests should be carefully scrutinized. There can be many factors which could make an inflated appraisal subject to legal challenge in addition to those mentioned in this article. In particular, the master lease provisions should be examined to determine what burdens are placed on the tenant. |
|
|