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Fannie Mae Selling Guide Change--Leasehold properties

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Joe Moore

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Jan 30, 2002
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Pennsylvania
Just about every appraisal I've seen where the property is "leasehold" the appraiser typically compares the subject to similar leasehold properties, or if these are unvailable makes dollar adjustments for the ground rent. The final value is typically consistent with the "indicated value by sales comparison.'

However based on my review of the revised Fannie Mae Selling Guide, it appears that a significant change is being mandated (see below), instructing the appraiser to hypothetically consider the subject as "fee simple" in the sales comparison approach (even if similar leasehold properties are used for comparison) indicating a "fee simple" value as the "Indicated Value by Sales Comparison" and then checking the "subject to" box, adding the text "See attached Addendum for development of capitalization rat and an expanded discussion of the comparable sales used and considered," and then providing a final value as the "leasehold value" (which would then be inconsistent with the sales comparison approach...).

Am I reading this right?

If I am, can anyone explain to me how this makes any sense when good leasehold data is available for comparison?

Thanks.

Joe





Section 312.03 – Determining the Leasehold Value


To determine the leasehold value of the subject property, the appraiser must first convert the annual income from the community land trust's ground lease into a leased fee value by dividing the income by the market-derived capitalization rate. The appraiser should then reduce the estimated fee simple value of the subject property by this leased fee value to arrive at his or her opinion of the leasehold value of the subject property.

Example: Assume that the annual ground rent from the community land trust's ground lease is $300, the market-derived capitalization rate is 5.75%, and the estimated fee simple value of the subject property is $100, 000.

· $300 annual rent/5.75% capitalization rate = $5,217.39 (rounded to $5,200)

• $100,000 fee simple value - $5,200 leased fee value = $94,500 (leasehold value)

Because our appraisal report forms do not include space to provide all of the details required for appraising a property subject to a leasehold held by a community land trust, the appraiser will need to attach an addendum to the appraisal report to provide any information that cannot otherwise be presented on the appraisal report form. On the actual appraisal report form, the appraiser should indicate "leasehold" as the property rights appraised, provide the applicable ground rent paid to the community land trust, show the estimated fee simple value for the property in the "sales comparison analysis" grid, and report the "leasehold value" as the indicated value conclusion. The appraiser should also check the box for "subject to the following repairs, alterations, or conditions" and add the following at the end of that statement: "See attached addendum for development of capitalization rate and an expanded discussion of the comparable sales used and considered."
 

Joe Moore

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Jan 30, 2002
Professional Status
Appraisal Management Company
State
Pennsylvania
To follow up, read the section below.. How can the appraiser In "make an appropriate adjustment on the 'sales comparison analysis' grid to reflect the market reaction to the different lease terms or property rights appraised," if the property is being evaluated as "fee simple" in the sales grid... Very confusing.


Joe



Section 311 – Properties Subject to Leasehold Interests


When a mortgage is secured by a leasehold estate (or is subject to the payment of "ground rent"), the borrower has the right to use and occupy the real property under the provisions of a lease agreement (or ground lease) for a stipulated period of time, as long as the conditions of the lease are met. (When the lease holder is a community land trust, there may be significant restrictions on both the purchase and resale of the property; therefore, we provide more detailed guidance on appraising this type of leasehold estate in Section 312 below) The valuation of a property that is subject to a leasehold interest may require a complex analysis, so an appraiser should develop (and attach as an addendum to the appraisal report form) a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions of the lease agreement or ground lease and discusses what effect, if any, they have on the value and marketability of the subject property.

In developing the sales comparison approach to value, the appraiser generally should use as comparable sales properties that have similar leasehold interests. When there are a sufficient number of closed comparable sales of properties with similar leasehold interests available, the appraiser should use them in its analysis of the market value of the leasehold estate for the subject property and report them in the "sales comparison analysis" grid on the applicable appraisal report form. However, if not enough comparable sales with the same lease terms and restrictions are available, the appraiser may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates-as long as he or she explains why the use of these sales is appropriate. In such cases, the appraiser must make an appropriate adjustment on the "sales comparison analysis" grid to reflect the market reaction to the different lease terms or property rights appraised.
 

Farm Gal

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Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
8O 8O
Thanks Joe!

IF I ever did one of these it would have to be a seriously Limited Restricted Use report, citing the Fannie documentation, the specific approach(es) taken and why.

OR I'd decline the assignment on the basis that the client was unable to define the parameters of the assignment.

I absolutely agree with you on the seriousness and idiocy of this particular policy: reading off your posts (lacking the time to go to the source myself), it also appears that one would have to have chapter and verse on covering ones rear so as not to render an appraisal in a manner that might be misleading...

Thankfully our market has very few of these aside from the Indian reservation properties... was this what they were attempting to address?
 

Joe Moore

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Junior Member
Joined
Jan 30, 2002
Professional Status
Appraisal Management Company
State
Pennsylvania
I received some quick clarification on this issue from Fannie Mae. The "subject to" question refers only to Leasehold Community Land Trusts, not typical leasehold properties. So in effect nothing has changed in regards to how typical leasehold properties are to be appraised and reported.

Joe
 
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