Help! Breaking In New Client!

[Austin]

Need some advice on dealing with this LO. I got a fax of 4 pages wanting me to do a full appraisal with self-contained report of limited appraisal of fee simple interest in the subject. This is one of the largest banks in the country and I have never done work for them before. They gave me the clients name to call for appointment. I called the client and he reminded me that I had appraised the property five years ago for another bank and the new bank had a copy of that appraisal. Subject property is a 4,000 sf five-year-old class S store building leased to a retail paint company (Sherwin-Williams Paint Co is tenant. Five years left on the lease with two five-year options to renew. Class A tenant.
I couldn’t figure why they wanted a fee simple interest appraisal on a property under lease, so I called the LO. He never heard of fee simple or lease fee. He wants an appraisal of the land and building. I tried to explain that I had to appraise the lease fee interest because that is the interest owned by the property owner. He said he was more concerned with what the property is worth as if there were no tenant and wants to know what it is worth with and without the tenant. This is a large commercial bank. What do I do? He said what I did in the last appraisal was what he wanted. At that time the building was under construction and the lease was pending completion of the building so I appraised the as is value of building and land and appraised the value of the lease fee estate after lease began. Any suggestions would be appreciated.

 

[Austin]

The plot thickens: I just got my original appraisal out from 1997 and read it. The land belonged to a family land trust set up for the grandchildren. One of the children, the present borrower and leaseholder, leased the land from the trust for 25 years. He then constructed a 7,600 square foot retail store building and leased it to Sherwin-Williams. I had appraised the leasehold value of the land lease and the subleasehold value of the building lease. Now I will never explain to the LO what he wants because I am not sure myself. The LO kept saying all he wanted to know was the value of the land but his borrower does not own the land he owns a leasehold interest in the land with the lease running another 20 years. If I couldn’t explain fee simple and lease fee, then how the hell can I explain a leasehold and subleasehold interest in the land & building of the LO’s borrower. I think. There were 40 pages of leases but fortunately I had summarized the 40 pages down to 2 pages. I think the LO needs to know the value of the leasehold interest in the land. Please put me on your prayer list.

 

[Farm Gal]

Austin:
If we take up a collection to send you to a class on meditation and relaxation...
(mid you this is a PRO-active - to be applied in advance 'cure')
...
Are you more likely to take the funds raised to the local liquor store and use a more old fashioned cure for your headache??? :lol: :lol:


Take a BIG breath before you go in: do this one in person...
Try to use words of one sylable, and take a big sheet of paper to draw pictures...

I would LOVE to be a 'lil bird in the corner....

Can you get someone in the room who has SOME unnerstandin?
If for no other reason than to get the guy to keep his yap shut long enough for you to give him the basics?!?!?

 

[xmrdfghap]

He said what I did in the last appraisal was what he wanted. At that time the building was under construction and the lease was pending completion of the building so I appraised the as is value of building and land and appraised the value of the lease fee estate after lease began.

So do it. You know what needs to be done. The fact that HE doesn't know what it is that he needs should not prevent you from doing it and doing it right. Appraise the value of the building and the land and appraise the value of the lease fee estate on the remainder of the lease. If the LO doesn't know what is going on, one of two things will happen: 1) He will get someone to explain it to him, or 2) he will be so baffled by your work that he won't want to admit that depth of ignorance and will pretend it is what he wanted in the first place. Either way, you win.

 

[Austin]

Gregg:
You are proably right but my concern is I don't know the purpose and intended use of the appraisal and I don't think the LO does either. His instructions say to appraise the fee simple interest but there is no fee simple involved as there are a lease fee owned by the land trust who the land is titled to, leasehold and subleasehold owned by the borrower and in my opinion the leasehold cannot be separated from the subleasehold. The LO specifically said he wanted to know what the land is worth but the client doesn't own the land. I will probably do as you suggest and just appraise the subleasehold and the LO won't know the difference, unfortunately some reviewer might know.

 

[George Hatch]

This is what happens when they migrate from selling cars to selling loans...

It's apparent that your LO doesn't know what he/she doesn't know. Regardless of your efforts to educate them on the differences in property interests, they don't have enough depth in RE to make an informed decision on which interest they need appraised. I would skip this middleman and go straight to whomever is going to be reviewing your work, or failing that, whomever is making the credit decision. Perhaps you can track down your original client on the prior appraisal. Hopefully, someone up the chain will have a better grasp of these issues and understand your attempt to define the problem.

It may be that laying out who owns each of the interests and asking whose interest they want appraised might be an alternative method of finding out without using the dreaded "fee simple/leased fee/leasehold/sublease" terms.

The good news is that at a very minimum, this person doesn't understand enough of what we do to intelligently read and understand your work; which, come to think of it, is also the bad news.

Just a thought.


George Hatch

 

[Restrain]

George, I respectfully disagree. You are assuming that the person up the ladder knows what they're doing, which is seldom the case.

I'm for just going ahead and doing the report like Greg suggested. The use is for bank lending purposes. As to the scope of the report, since they want one like the one before, there's your scope. Just explain in words of two syllables or less what you're doing and charge them accordingly. Far too often the commercial people are those who just got moved over from residential lending and the only lease they know is the $700 for a 2 bedroom, 1 bath condo.

Roger

 

[Austin]

I have had this appraisal laying here on the desk for three days still trying to figure out what to do and the more I think the worse it gets. There are two ways to look at this problem: The borrower and leaseholder in this case is the son of the founder of the family trust that owns the land lease fee interest or land title holder. The land lease runs out in 20 years. Would you purchase a leasehold interest in this property knowing that in 20 years you had to renegotiate a lease with a family trust controlled possibly by the person that sold you the leasehold interest? In simple terms, would a buyer in estimating a value of this leasehold interest consider a residual value in the property at the end of the 20-year term? If I were appraising the investment value of this borrower I would consider and estimate a residual value at the end of the term because I know he has enough control to at least get some reasonable lease renewal that a non-family member would not enjoy. For that reason I have toyed with the idea of reporting a market value and an investment value to the borrower.
This is a complicated problem. There is a leasehold interest value in the land but I don’t see how it can be separated from the subleasehold value in the building because to allocate the value of the leasehold interest in the land would essentially devalue the value of the subleasehold interest in the building lease because the land and building rents are fixed. In other words, the two interest can’t be separated.
I am seriously thinking about writing a letter to the LO & his reviewer explaining the layers of interest, explaining the difference in my view of market value and investment value as I just outlined, and tell them I can only estimate the market value of the leasehold interests under the assumption that there is no residual value at the end of the lease for reasons just explained or appraise the investment value (which is highly subjective due to land lease renewal). If I use the first method and report a market value under those assumptions the value estimate will be much lower than in the last appraisal and if I estimate the investment value the lender may say it is misleading. If I don’t report the investment value the borrower may be misled.
All suggestions welcomed.

 

[Tim The Enchanter]

1> In simple terms, would a buyer in estimating a value of this leasehold interest consider a residual value in the property at the end of the 20-year term?

If I were appraising the investment value of this borrower I would consider and estimate a residual value at the end of the term because I know he has enough control to at least get some reasonable lease renewal that a non-family member would not enjoy.

This appraisal is over my head, but I would like to comment.
1> Considering that you can't have much realistic idea if you'll have a residual value or not after 20 years (could it be negative, cost to remove building?), I feel like a buyer would probably not give much if any residual value at lease end.

2> Even though the lessor is a family member, if the lessee doesn't own at least a partial fee interest in the land, how much leverage are they CERTAIN to have? Families are not immune to arguments.

2 cents worth.

 

[George Hatch]

Austin,

You have identified a situation where the market value probably is different than the value to the lessee. You also have basically decided to show it both ways. As far as I'm concerned, this is always going to be the right choice because it places the responsibility for the loan decision with the person/s making it.

The bank is probably going to make their decision based on the market value, as well they should. If there is no (or effectively no) reversion to a leasehold, then of course it is going to end up having a diminishing value as the remainder of the lease gets shorter. I doubt the property interest will be marketable by the time it gets down to the final 5 years, and I doubt most lenders are going to want to deal with this after it gets below 15 years. Pointing those elements out will be just as important to your readers as your final value conclusions. That is, assuming anyone at that bank can understand the theories in play (point well taken, RStrahan).


George Hatch