REAL ESTATE NEWS

A property can report 85% occupancy and generate enough income to cover debt service—and still leave its owner with an interest that has almost no value.

That is the lesson from Valencia Town Center, a nearly 400,000-square-foot mixed-use property in Santa Clarita, California, where the collateral behind a $28.8 million CMBS loan was recently appraised at $1.4 million. The property's appraisal at securitization in 2017 was $82.1 million, according to a recent episode of The TreppWire Podcast. The difference is not merely a dramatic example of office-market stress. It is also a warning for net lease investors about the risks embedded in leasehold ownership.

A Different Ownership Interest

The CMBS loan is backed not by fee-simple ownership of Valencia Town Center, but by the leasehold interest. That distinction matters.

A fee owner owns the land and, generally, the improvements attached to it. A leasehold owner holds the right to use and control the property for a defined period under a ground lease or similar agreement. The leasehold interest may have substantial value when the building is occupied and produces dependable income. But its worth can deteriorate quickly if tenants leave, financing becomes difficult or the ground-lease economics no longer work.

At Valencia Town Center, those pressures appear to have converged. Trepp reported that special-servicer commentary indicated no purchase offers had emerged during roughly a year on the market, no agreement had been reached between the fee and leasehold owners and the fee owner was pursuing remedies. The leasehold owner was preparing to abandon its interest.

"Leasehold interests can lose nearly all of their value when tenant demand weakens and the leasehold structure prevents the parties from reaching an economically viable solution," Stephen Buschbom, Trepp's head of applied research and analytics, said during the podcast. Buschbom is a host of The TreppWire Podcast, while Lonnie Hendry, Trepp's chief product officer, is a co-host.

Tenant Rollover Changes The Equation

The property's largest tenant, Princess Cruises, was central to the decline. Trepp said Princess had offered almost 290,000 square feet for sublease and intended to reduce its occupied space to about 138,000 square feet by April 2026.

The tenant also had several leases accounting for 35%, 23% and 15% of the property's rentable area. One expired in June 2026, another in March 2026 and the remaining lease runs through the end of 2027, according to the podcast.

That rollover profile helps explain why the reported 85% occupancy and 1.51x debt-service coverage ratio for the first quarter of 2026 did not translate into lasting value. Current occupancy measures the rent roll at a moment in time. It does not necessarily capture a major tenant's planned downsizing, near-term lease expirations or the cost and uncertainty of backfilling large blocks of space.

For a net lease investor, the takeaway is straightforward: a long lease is valuable only as long as the tenant remains committed and capable of performing. When the tenant's plans change, the real estate's residual value becomes much more important.

The Fee Owner Matters

Leasehold investments add another question that fee-simple buyers do not face in the same way: What happens when the leasehold owner needs help from the fee owner?

A distressed leasehold can require amendments to ground-rent terms, extensions, lender consents, new capital or a restructuring of the ownership arrangement. Each may depend on negotiations with the fee owner. If the parties' interests diverge, the leasehold owner may have limited options even if the property remains partly occupied.

The Valencia situation illustrates that risk. Trepp's podcast described an impasse between the fee and leasehold owners, with no agreement in place as the property's dominant tenant reduced its footprint and the leasehold owner prepared to walk away. "The collateral was appraised at a value of $82.1 million at securitization in 2017," Buschbom said. "The most recent appraisal valued the collateral at $1.4 million."

Underwrite The Residual Value

The case should not be read as a verdict on all leasehold or ground-lease net lease investments. Many have durable tenants, long remaining terms and well-defined rights that make their income streams attractive. But Valencia Town Center shows why investors should not treat a leasehold interest as equivalent to owning the land outright.

Before committing capital, investors need to understand the remaining ground-lease term, rent-reset provisions, extension and purchase options, transfer restrictions, lender protections and the rights available if the tenant fails or leaves. They also need to test whether the property has a viable second life when the existing rent roll changes.

Net lease underwriting often begins with tenant credit, lease duration and rent. Valencia Town Center reminds us to end with a harder question: What is the investor's interest actually worth when those payments stop?

Source: GlobeSt/ALM