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CharleyLake
Member since Oct 2006
1025 posts

Pipeline corridor valuation
Some of my cousins wish to sell their undivided interest in a pipeline corridor (to family first) that has several pipelines which have renewable rental payments every ten years adjusted by the CPI.

The corridor is small and has no other value. There is no upkeep and parish taxes are minimal.

Is there a simple method to determine value, for example, average annual income times a certain number of years? Some of the pipelines are over fifty years old.


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
What is the weighted average lease term? And how likely are the various lessees to renew? Who pays for pipeline maintenance and replacement? Is the CPI adjustment once every 10 years or does the adjustment take the previous 10 years worth of inflation into account?

If the weighted average lease term is, say, 10 years, I’d start with the 10 year Treasury yield and then apply a risk premium corresponding to the riskiness of the cash flow streams (which will in large part depend upon the contractual terms of the leases and the creditworthiness of the lessees). I’d use that as my discount rate for the remaining lease life.

As far as lease renewal potential goes, I’d discount the post-lease cash flows using a discount rate that accounts for the probability of renewal.

Then calculate the NPV net of expenses such as property taxes and any other expenses of the lessor. If the cash flows are nominal (i.e. consider the effect of the CPI escalator), you’d also want to use a nominal discount rate (i.e. one that isn’t reduced by expected inflation).

Off the cuff, I’m thinking a high single digit nominal discount rate would apply here.


CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
Thank you the information. I think that I could use a little more guidance.

The average lease term is for ten years with options to renew one or two times by the anniversary date. The pipeline companies pay for their maintenance I know of only one abandoned pl in 4 years. Assume no landowner expenses. CPI adjustment appears to be calculated both ways. I can only guess at $700>$800 is the current average price per rod.

This subgroup owns 1/6 of the corridor. I estimate that their share of rental income was about 35-40 K for the last ten years. Most of the other owners, all cousins, want to purchase their interest at a fair price because they have suffered recent property damage from hurricanes/flooding.

An estimate or guess of a reasonable offer would be appreciated from you.


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
How many different leases are there?


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
I've got a model you can plug and play as you see fit. If you want it, leave me your email address and I'll send it to you.


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CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
There are fourteen (14) ROW agreements. Three of them will likely be renegotiated for renewals in 2023 and 2024. The older ones are for natural gas and hydrocarbons; most recent are for industrial gasses.


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
Good deal. Making sure you saw my response after the one you responded to.


CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
Excuse my ignorance. Is there a way to do this without putting it on this forum?


Twenty 49
LSU Fan
Shreveport
Member since Jun 2014
14740 posts

re: Pipeline corridor valuation
I would "do the math" then additionally discount the price due to the lack of marketability of a small undivided interest (who other than a current co-owner would buy it?) and the risk associated with owning land that could result in a lawsuit for environmental or other issues related to the pipelines.

It's not like you're buying a savings bond; there is risk of greater expenses (or reduction in revenues) in the future. That risk should be reflected in the price.


lighter345
New Orleans Pelicans Fan
Member since Jan 2009
11579 posts
 Online 

re: Pipeline corridor valuation
Just Set up a burner email to post publicly.


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RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
quote:

discount the price due to the lack of marketability of a small undivided interest (who other than a current co-owner would buy it?)


This should be able to be addressed via the discount rate and an assumption around low (or more likely zero) terminal value. I personally would assume a TV of $0 and a discount rate much higher than the going yield for real estate or infrastructure investments (on account of the illiquidity and other risks you’ve identified). I’d probably also assume a 0% chance of renewal of any of the leases unless the seller could convince me otherwise. I’m thinking a DR in the 8-9% range is reasonable (not insignificant in the current low yield world). What do you think?

quote:

the risk associated with owning land that could result in a lawsuit for environmental or other issues related to the pipelines


Should be captured via the discount rate or an explicit cost assumption in the model.
This post was edited on 6/5 at 8:38 am


CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
Per mutual understanding, if sold, it will be to present co-owners. I have no understanding of the marketing terms but if you want to make an estimate on what was provided, please do. I thought it would be much simpler. I can ask my tax preparer to work something up for us and will let you know when we get an answer.
Appreciate your interest.


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
(no message)
This post was edited on 6/8 at 11:54 am


CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
Greatly appreciated!


Enfuego
Tulane Fan
Uptown
Member since Mar 2009
9674 posts

re: Pipeline corridor valuation
8-10x last twelve months net cash flow is what I would push for.
This post was edited on 6/8 at 9:55 am


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
Just sent.


CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
I am in receipt. I do have some research to do and will plug in the data to the model.


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CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
Very helpful. My tax preparer is quite busy at this time. I calculated 83.2 K for ten years. Three siblings shared 1/6th interest (13.863 K average yearly income). Your values would have a range of about $109>137K, which is a good place to start. The sellers(3) and buyers(between 12 and 21) are all cousins and this arrangement is harmonious.


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CharleyLake
Member since Oct 2006
1025 posts

re: Pipeline corridor valuation
I changed the escalator to 1.2, the tax rate to 12% for the sellers assumed bracket, and the discount rate to 6%
Was the 9% based on the S & P return or another benchmark? It makes an appreciable difference.


RedStickBR
LSU Fan
Member since Sep 2009
14474 posts

re: Pipeline corridor valuation
The escalator should be whatever the ROW agreement says it is, but you mentioned CPI, so I thought 2%ish was appropriate.

The tax rate should be the Buyer(s)’ expected marginal tax rate, not the Seller(s). The Buyer(s) will be the one(s) paying taxes on the cash flows after sale.

The discount rate is going to move the needle quite a bit. You need to think about what the risk actually is and compare the discount rate assumption to other investments to determine whether or not it is appropriate.

Treasuries and municipal bonds are 1-2% ish.

Investment grade corporate bonds are 2-3% ish.

High yield corporate bonds are 3-5% ish.

S&P 500 earnings yield plus dividend yield is about 5-6% ish.

Real estate cap rate plus inflation is maybe 6-7% ish.

Infrastructure is maybe 6-8% ish.

I put the discount rate at 9% because I view this one off, illiquid investment as riskier than all of the above, but you have more information than I do and risk is subjective.
This post was edited on 6/9 at 12:31 pm


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