Land Lease

[gcapps]

Here is the scenario - homeowners just want to know what their house is worth without the land because they do not own the land. They said when they got insurance, the insurance company did a cost approach. My question is if the client (homeowner) wants the same value coming from an appraiser, wouldn't I do the cost approach and sales approach and extract the land value. What if they do not have access to this lease?

I have never done an appraisal with a land lease.

Can I do it the way the homeowner wants as I indicated above?

Must I do an income approach?

Please help. My appt. is Friday.

 

[Howard Klahr]

Welcome to the Forum.

In order to best answer your question we need additional information. What is the intended use of the appraisal - Insurance Value, Market Value?

Since the house is situated on leased land, that does not necessarily eliminate a value contribution for the interest in the land - leasehold value. However, land value or the value of the leasehold may not be relevant for your client's needs/intended use.

With regard to what valuation approach(s) is/are relevant, this also is dependent on the intended use and definition of value.

 

[gcapps]

Thank you for your help. My client is filing bankruptcy and needs to know the market value of their house only. You are right in saying the land value or the value of the leasehold is not relevant to my client's needs. Therefore, that brings me to my original question. I understand my comparables should also be landleased, but would I rely mosty heavily on the cost approach?

 

[leasedfee]

Gcapps,

The homeowner (client) wants to know the value of the leasehold interest.

The insurance company had a completely different collateral scenario to evaluate. Insurance cost valuations usually have special exclusions, inclusions, and policy assumptions/benefits having nothing to do with market value. Insurance cost values ignore things like external obsolescence.

This appraisal cannot be done without a complete copy of the executed lease. What if the ground lease is for $1/year for 99 years? What if it expires in 5 years and the home reverts to the landlord? 20 years? What if the lease payment is above or below market ground rents? Options; expense inflations; escalations; et cetera.

All three approaches to value may, or may not, be applicable. This is not simply chop off the land value in the cost approach.

You said this is your first land lease project, so I would very highly highly recommend working with an experienced colleague or mentor, or as others have mentioned, refer this to someone in your area and then participate in the project as the secondary appraiser. You have a large amount of homework to do by Friday, but properly done it can be a very intellectually rewarding experience. You may never "see" real property quite the same way again. Others, I'm sure, will offer additional pertinent advice.

 

[Abester]

would I rely mosty heavily on the cost approach

Not likely.

If your property has market value, it has a benefit to a typical market participant. Identify how that benefit is measured in the marketplace.

 

[Ken B]

If your property is located on Tribal land or land owned by a Community Land Trust (the most common situations where the building is owned and the land is leased), HUD and FNMA have guidelines with recommended procedures for appraising these properties. The guideliness will probably be informative even if the situation is different.

 

[Howard Klahr]

My client is filing bankruptcy and needs to know the market value of their house only.

If the intended use is for bankruptcy, then the interest appraised is the market value of the leasehold estate. This would include a possible contributory value if there is a positive leasehold value.

You are right in saying the land value or the value of the leasehold is not relevant to my client's needs. Therefore, that brings me to my original question. I understand my comparables should also be landleased, but would I rely mosty heavily on the cost approach?

I did not say that it IS not relevant, I said it MAY not be relevant. As I noted above, in this situation it is clearly relevant.

Also, for the assignment as described, IMHO all three valuation approaches would be relevant to the assignment. The contributory value of the existing land lease is pivotal in preforming this assignment. Do the the existing lease terms reflect current market levels?

 

[PropertyEconomics]

The most important piece of information that has not been provided was pointed out by Leasedfee ... what are the terms of the underlying ground lease. Without those terms you are only spinning your wheels and the question you asked cannot be simply answered.

 

[Richard Carlsen]

This could be considered to be a complex assignment. If you do not have experience in determination of value for a possessory interest, you would be best to decline the assignment or get help from a qualified appraiser.

And everyone is right: you have to know the length and terms of the underlying land lease in order to calculate any possessory value for the underlying leased land. Without that, you cannot come up with a Market Value which has to include the underlying leasehold interest (the leased land) and the possession of the improvements.