Cost Approach on Leased Land

[Matthew Jehs]

I am working on two bank branches on leased land. It is likely that this will be a growing trend in my market. Does anyone know of any articles or AI publications regarding the accepted practice of applying the cost approach on newer properties when the land is under a long term ground lease. Most of what I have found so far has been vauge. Thank you.

 

[stefan olafson]

There is a leasehold interest the banks have on the underlying ground, you can check the market for other leases to assist in arriving at a value per acre or square foot for the land using the sales comparison approach. Then just complete the cost approach on the improvements properly and you should have your bases covered.

 

[leasedfee]

leasehold values

Matthew,

The article in The Appraisal Journal, Spring 2008, "An Introduction to the Valuation of Aircraft Hangars—Part 2" handles a long-term land lease with a new building. The article attempts to walk the reader through a leasehold valuation and the time-value-of-money principles affecting the building and the land interests. You may also try to obtain it here (hopefully the link works): http://sites.google.com/a/safiya.us/safiya/

Best wishes,

Timothy J Lindsey, MAI

 

[gcapps]

Has anyone ever done an appraisal on a land lease and what is the best approach. I would say the value is derived mainly from the cost approach. Am I correct

 

[Rob Lentz]

What are you to appraise?

You must start with the property interests you are appraising, i.e.

Fee simple, Leased fee, or Leasehold

and your client's needs before you get to what approach is best suited to your appraisal problem.

In most cases I would think you'd be asked to value the leased fee estate, in which case the terms of the lease (including rent, options, expenses, etc.) would be paramount and the Income and Sales Approaches would be your most reliable and applicable. The Cost Approach is generally considered redundant of the Sales Approach in the valuation of vacant land.

Do a search on the forum for "ground lease" - you should get a good bit of discussion on the topic. Also the Appraisal of Real Estate, 13th Ed. (as do earlier editions if you haven't gotten the latest edition) has a chapter on Partial Interests that would be a good read.

 

[Terrel L. Shields]

Has anyone ever done an appraisal on a land lease and what is the best approach. I would say the value is derived mainly from the cost approach. Am I correct

nope. at least not necessarily. The sales approach would be my preferred method and it will relate to the income you attribute to the land and building. Airport hangars are classic. They are usually larger simple buildings and rent the ground space from the airport authority. You need to analyze sales to attribute a value to ground and/or building by a residual method. Say you have 25 years ground lease at $0.25/SF for a 10,000 SF parcel. That annual $2500 rent capitalized at 4% (1/25) = $62,500 attributed to the land value...or using 12C. input 25 n 4 i 0 FV 2500 PMT and hit PV..$62,176. Subtracting that from the sales price of the Comp Hangar yields the net to improvements.

 

[gcapps]

ground lease

Thank you for the response. I had no idea it was that involved. My client is filing bankruptcy and wants to know what their house is worth minus the land. I thought I was just going to use the sales and cost approach and extract the land value. After reading your email, I do not believe I am qualified to accept this assigment.