HELP! - Valuation of Leased Land - Residential Site

[CTKoch]

I received a call from an AMC requesting an appraisal of a small cabin on a leased site (99 yr forestry lease) located in on a lake within federally owned forest land. I have several comparable homes in the immediate development for the sales comparison approach, but have never appraised a home on leased land. I'd appreciate any tips for determining site value... Also, would this be a leasehold interest for the home owner purchasing or is it still fee simple ownership?

 

[CANative]

A lease that long is probably the same as the fee.

 

[Chandler]

Unfortunately I can't help but maybe one of the so cal appraisers can offer some assistance as back home in the Irvine and Newport Beach areas a lot of the properties are on land lease. if all else fails try to call an appraiser or instructor in that area. good luck!

 

[Howard Klahr]

The land value is not relevant in that the leasehold owner does not have an ownership interest. Are other sites available for lease under the same terms as those of the subject site? If so, the lease terms are likely at market and therefore the leasehold value of the site would be zero.

You indicate that you have improved comps to do a sales comparison approach. Are the properties leaseholds also? If not, you would need to make appropriate adjustments or those properties would not be comparable to the subject.

 

[George Hatch]

Leasehold interest, which means your best comps would be subject to the same type of lease, even if the homes themselves aren't that similar.

If you don't have any recent sales of these leasehold interests then your next best bet is to conduct a comprehensive analysis of the sales history of the other residential properties in the area that do have such leases in order to identify their most recent respective sales.

If you can find 3 or 4 of those then you can compare those sales with sales of other similar properties without the lease that also closed during the same time frames. If there's a difference in pricing between them you can apply the same ratios to your current comps.

The terms of the land lease may be favorable to the landlord (with an above market rent relative to the value of the site) or to the tenant (with a below market rent), but either way the tenant is paying rent for the site in addition to buying the structure onsite. It's like the difference between appraising a mobile home in a mobile home park where the pads are rented vs owned.

Another way to do it is to approach it from an income perspective, but I wouldn't recommend doing that unless you've got a handle on present value discounting and other income capitalization techniques.

 

[PropertyEconomics]

At 99 years ... the possessory right most probably does equal fee ...

 

[Restrain]

If it is a state/federal forestry lease, there is probably a provision that allows for cancellation of the lease. The 99-year lease also has an original start date, and end date. It is not 99 years from the current date.

As this is a lease-hold situation, I would not attempt to do a site value without a full examination of the lease and all its terms. Further, you would have two values. First there is the lease return to the entity based on the lease payments. Then based on general land sales , you would have the value imputed to the property for the difference between probable market rent and the lease rent.

Ask the client if it really needs a site value estimate given the unique nature of the subject before going to this much effort. Remember that you cannot impute the full value of the site to the subject as at some point the lease will go away.

 

[bnmappraisal]

look for other leasehold comps; it sounds like you have some. Check into how many years are LEFT on the lease (99 yrs total, but maybe that was 50 years ago???)
I agree, typically with a 99 yr lease, the value is probably the same as fee simple. But the closer to the 99 yrs it is, there may be a diminishing return. just my opinion...

 

[Meandering]

Here,

The state has some leased residential sites within some of the state forests. One of the critieria for being able to put a cabin on one of the leased sites from the state is that you must be a state resident.

Here is the state's website concerning it,

http://www.dcnr.state.pa.us/forestry/recreation/leasedcampsite/index.htm

and here is the FAQ which could answer some more questions.

http://www.dcnr.state.pa.us/cs/groups/public/documents/document/dcnr_009406.pdf


.

 

[leasedfee]

A lease that long is probably the same as the fee.

I respectively disagree.

Sorry, I have to couch this explanation in more technical terms.
Only if the lease payment is nominal, like $1/year. Then the LH is equal or nearly equivalent to the FS when in perpetuity. 99 years is near perpetuity for discounting purposes. The model then has two value components with one opinion of value:

V_LH = V_B + (V_L market minus V_L contract).

As can be seen, if the value of the contract rent to the land is near zero, then you have the value of the building and the value of the land, which takes you to an equivalency of V_LH = V_FS. On the other hand, if the contract rent is at and follows the market rent over the lease term, e.g., inflation adjustments, then the second math term drops out, leaving

V_LH = V_B.

This model is a simplification of the full model because in perpetuity the PV factors zero out short-term property rights. In a very low interest rate/yield environment, once it falls to below 50-60 years, then present value and annuity factors kick-in. As time value of money is exponential math, it is small at year 60 but accelerates quickly when shorter.

This model also assumes that it is purely a land lease, and not some mixing of land rent with a little building allowance by the LL.