Income approach and property rights appraised.

[Caterina Platt]

Fredrick,

I can only think of three possibilities in the residential realm-

Co op building

Indian Reservation

State Park/Recreation Facilities. Very little lakeshore property is fee owned in NM. The majority of this land is part of our State Parks and Rec. system. The dwellings surrounding these lakes are almost always sitting on property that has a state issued 99 year lease.

When you are appraising residential income properties, most likely it is for the owner who holds fee simple estate and leases a portion of his bundle of rights (only on a temporary basis) for income.

 

[Frederick R. Ruffell]

Catrina,
Thankyou, and I would eliminate the Co-op from your list because the last time I appraised on I used a co-op form not the 1025. I have appraised duplex and quadruplex condos, but have never run across a 2-4 unit co-op.

 

[Anonymous]

There is another situation that could come up. I am very close to the Smokey Mountain National Park. In the Park, there are some cases of land leased to "home" owners for 99 years. They have a house on the property but do not own the land. Over the years, I have been asked to appraise one of these probably 4 or 5 times. When I call the lender and make sure they understand, they quickly cancel the order. None of them around here will lend on a home that doesnt own land.

 

[bradellis]

And, I thought we all knew it all! HA!

Ok, here's my take- and thanks to all for the input:

Frederick (first I apologize for confusing the matter); On 2-4 units they should virtually always be done as fee simple. One poster mentioned the length of the leases- quite right. Takes more than a year or two of being encumbered by a lease. Technically, when property is under lease, the owner's interest is leased fee, but no one wants to really know about that in normal circumstances. So. do the 2-4 as fee simple. (Of course, it the assignment is for some other purposes- legal etc,, you take your lead from the client and what they want appraised.).

Now on to the condo on Indian land. I believe that it should be fee simple. Although the land is under lease and the unit owner is obligated for that portion, how could it be a condo if the land were owned by individual unit owners? Were that the case, it would be a PUD- even if the common elements were technically under condo ownership. In such a case the PUD would be comprised of the individual units plus the condo owning the common elements.

Because the individual unit is a condo, and that is what we are appraising- condo ownership rights- it ought to be fee simple and consist of the unit itself along with the percentage of ownership in common elements. In my opinion, it is the common elements that are under land lease.

Brad Ellis, IFA, RAA

 

[Paul Ness MAI]

Brad, you correctly stated "it is the common elements that are under land lease", but in the same paragraph you also correctly stated that condo ownership includes a share of the interest in the common elements. Common elements include the land, so in your example a portion of the condo unit ownership includes a share of the leasehold interest in the land.

You bring up a common misconception that condo ownership does not include the land, but it is part of the common elements. Everything outside the air space of the units consistutes the common elements...outer walls, foundation, all public areas of the building, recreation buildings, playgrounds, tennis courts, driveways, parking lots, and yes the land. FYI, limited common elements identifies certain common elements reserved for the use of some, but not all condo owners (parking spaces, storage units or even plots of land possibly surrounding a particular unit). And, yes, condominium ownership is a form of fee simple interest.

 

[Caterina Platt]

Good point Frederick! Honestly, I know of no true 'Co op's in my area. Wouldn't know quite what to do with one.

Paul and Brad,

If I remember my old condo docs properly (this was 12 years ago, and prior to any real estate experience), the encumberance of an individual unit only took into account the airspace owned, and if any, on the structure of a garage. The land under the garage remained part of the common elements. The common element interest could not be encumbered by a mortgage of an individual unit. The presence of these common elements was a benefit to all and added value, however it would seem that individual encumberances couldn't be placed on those common elements. Imagine a large federal tax lien on an individual? Would the HOA potentially become liable?? Based on this premise, the estate that is being appraised in the Indian Res. condo would be fee simple. The airspace within the walls of the unit only.

I am not positive on this, and the possibilities are beginning to make my little head spin, but I do believe the only 'common element' liability that the HOA assumed was for their own fees in the case of a default. Granted, as with the co ops, I don't run across these in my market and have no day to day experience appraising them. Trying to learn myself from this as well.

What say you?

 

[Jo Ann Meyer Stratton]

Although I haven't done an appraisal of a condo since coming home 5 years ago or a co-op or a leasehold in 7-8 years I will have to join in. In Arizona a condo has a paragraph about horizontal property regime in the CC & Rs. If it doesn't have that comment (regardless of name of subdivision or what the developer or county assessor or building department call it) it is a PUD, not a condo. And with that comment, all they own is the air space inside the unit from the back of the drywall and an undivided interest in all common areas. If that comment is not in the CC&Rs, then they own the interior and exterior walls, ground underneath and maybe some surrounding ground, as well as have an undivided interest in any common areas. There are leasehold properties on state and federal land, Indian reservations and in Scottsdale is one subdivison that all the land is privately owned with the home owners having a 99 year lease of the site area. Had to make sure only sales/ listings from that subdivision were used since it was the only leasehold subdivision in the entire state (at least affidavits of value were filed so sales could be identified and verified in a second public source). On a Indian reservation, federal and state lands, nothing is recorded or filed anywhere so verification is very diffucult since they are not sold through any realtors. And then there is Sun City/Sun City west which is a completely differant animal of its own.

 

[Frederick R. Ruffell]

I agree with paul as to condo ownership. The individual unit owners useually own the land in common, indivisable. Some condo projects might sit on leased land in that case they may own a leasehold interest in common, indivisable.

 

[Paul Ness MAI]

The value that you estimate for a condo represents the interest in the unit’s air space PLUS an undivided interest in all common elements, including the land. Title is held in fee simple and can be sold, leased or mortgaged. I work for a commercial bank, and when we make a loan secured by a condo it is a lien against the condo unit (legally defined in the doc’s typically as the air space plus a specific percentage interest in common elements). There is additional wording in the loan documents that identifies the individual unit owner’s personal liability, so title to one condo is not jeopardized by the default of another unit’s owner. The condo association does not own the common elements as an autonomous entity, and so the association can not pledge common elements as collateral for a loan. The condo association is formed to manage the commonly held real estate in practically any form chosen (elected board or management agent or whatever).

With regard specifically to the land issue – a condo unit owner may own 0.01% or 0.023% or whatever proration of ALL the land identified in the declaration. In a non-condo housing situation (i.e. a PUD), the unit owner owns 100% of the land under their unit and possibly the front and/or back yard, or wherever the survey identifies each lot, similar to a single-family detached lot. They may or may not own an undivided interest in certain identified common elements. In a co-op, the owner is a shareholder in the corporation which owns the entire property, including the land (I have no experience with co-op appraising or lending).

 

[Caterina Platt]

Thanks Paul!

This concept of undivided, partial interests drives me nuts sometimes. If I can't visualize it....I understand that the HOA doesn't own the common elements, however it is responsible for the maintenance and represents the collective interest of all owners in the common elements. If the pool requires a major overhaul, then all become responsible for it's costs, which are absorbed with the HOA fees. I suppose in the example I gave of a tax lien, even Uncle Sam would not not have the right to step in and put a lock on the pool house or partition off the flower beds for 'his .01%'.

When I think of undivided partial interests, and say a tax lien for example, I think of it tying up the entire property and clouding the title. But I then that wouldn't apply here, as the entire condo project would never be transferred as a whole. :roll: Sigh, makes sense. Thanks again!