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Cost Approach On A Land Lease

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J Grant

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Subject is being sold by a community development agency, a brand new house , sold below market because the agency will retain ownership of the land ( and lease it for 99 years to purchaser , lease gets passed on if they resell). I am okay as to how to value it (I have sales with land leases and sales without), ut I am wondering how to do the cost approach..

Cost approach...would I put Zero for the land, becaue subject does not own it, and then put the land value in narrative comment , the land has value but ownership is retained from the agency? II'm leaning toward this one

Or put land value in cost approach, then explain the value is to develop the approach onym since the subject has right to use the land as a lease but won't own it?
 

Sid Holderly

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I would not put the land value in the top part of the cost approach. But might put the amenity value (discounted for lack of ownership) on the bottom line with the other amenities. Just a thought, This would be a very uncommon situation in this area.
 

Ken B

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You are not valuing the dirt, but the property rights. The property rights held by the tenant in a property they have leased and not subleased represent the leasehold estate. The leasehold estate can have value. If, as I suspect, the land lease is for a nominal amount and the lease period is as stated, I would expect the value of the leasehold estate to have value equivalent to the value of the fee simple estate.

Do not assume the property has sold "below value." If there are income restrictions affecting any future resale of the property, that needs to be a consideration in the market value of the property. An income restricted apartment property will sell for less than a market rate apartment property due to the lower rents the income restricted property can collect. But that doesn't mean that the price paid for the income restricted property isn't a market price and the value opined for such a property can be market value, even if a property otherwise identical in location and physical characteristics might sell for more if it does not have the income restrictions.
 
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J Grant

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good points..along the lines of my thoughts, yes there are sale restrictions with CRA having right of first refusal...The property did not sell "below value" compared to other leaseholds sold by the CRA, it did sell below prices of similar homes that own the land.
 
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Ken B

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good points..along the lines of my thoughts, yes there are sale restrictions with CRA having right of first refusal...
Those deed restrictions have an effect on the property rights that need to be considered when comparing the property to a sale which did not have such restrictions.
 

J Grant

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Florida
Those deed restrictions have an effect on the property rights that need to be considered when comparing the property to a sale which did not have such restrictions.

for sure.
 

Howard Klahr

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What type of value are you reporting? I ask, because if it is subject to all kinds of restrictions it may not be market value as defined.

According to the land lease, who owns the improvements? What happens to the restrictions in the event of default on the mortgage? Do they survive foreclosure?
 

Ken B

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good points..along the lines of my thoughts, yes there are sale restrictions with CRA having right of first refusal...The property did not sell "below value" compared to other leaseholds sold by the CRA, it did sell below prices of similar homes that own the land.

Define "own." I know what it means colloquially. But it is not an adequate description of the ownership rights held by someone who received title to the property in fee simple estate unencumbered by a lease. A tenant also "owns" property rights for the period of the lease, subject to the terms of the lease, by virtue of the transfer of those rights from the landlord to the tenant.
 

J Grant

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The buyer owns the improvements ( house) ..at least per conveyance of contract, payment at closing and title work proposed in the contract.

The buyer owns the improvement but does not own the land, has the use of the land through the land lease.99 years renewable

The assignment is market value for mortgage loan purposes..

The MV is a form of restricted value, they are allowed to sell it but CRA has right of first refusal and it sells with the land lease passed on to new purchaser...so it can trade on open market but as a property with restrictions (I am checking on the details of resale).

Who knows if bank will finance it... these types of homes with land leases sold by CRA have been financed so there must be programs in place that accept them... I will disclose and then it is a lender decision on their end.
 

Ken B

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Someone current on the residential side can correct me if I am wrong, but there is a place on the URAR to report that the leasehold interest is being valued and the Selling Guides provide information regarding valuation of leasehold interests. It's different, but not unheard of.
 
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