Lease Land Question

[Delta85]

I've been asked to do an FHA appraisal on a property that is lease land. Client tells me they know comps are all likely to be fee simple and it is ok to use them. They said it is ok to include the value of the land if comps are fee simple.

How would you guys go about coordinating and executing this report and how would it look on your grid?

Thanks for the help.

 

[PropertyEconomics]

I've been asked to do an FHA appraisal on a property that is lease land. Client tells me they know comps are all likely to be fee simple and it is ok to use them. They said it is ok to include the value of the land if comps are fee simple.

How would you guys go about coordinating and executing this report and how would it look on your grid?

Thanks for the help.

Your client is wrong. Without being able to measure the effects of leasehold interest versus that of fee simple interest, and making any necessary adjsutments, what you describe is not the proper technique for measureing value of the leasehold estate.

What are the provisions of the lease? How long is the lease for?

 

[Delta85]

I believe it is a 99 year lease. This request is in its earliest stages and I am only now beginning to gather information.

 

[Don Clark]

Your client is wrong. Without being able to measure the effects of leasehold interest versus that of fee simple interest, and making any necessary adjsutments, what you describe is not the proper technique for measureing value of the leasehold estate.

What are the provisions of the lease? How long is the lease for?

I would listen to PE. I might also suggest that it is very similar to a Co-Op except that there is a greater ownership interest in owning the improvements in the present case, whereas in a co-op you only have an interest in the improvments by virtue of stock.

I might also suggest that you seek out an appraiser, maybe a CG that has completed such assignments and work with them on this. This is not a typical single family fee appraisal. Charge for time and effort.

 

[aussie ken]

I've been asked to do an FHA appraisal on a property that is lease land. Client tells me they know comps are all likely to be fee simple and it is ok to use them. They said it is ok to include the value of the land if comps are fee simple.

How would you guys go about coordinating and executing this report and how would it look on your grid?

Thanks for the help.

There are historical precedent UK, Canadian, Australian and certainly US court cases that have established that very long leasehold property (ie 99 yrs) can have values equal to freehold............... Certainly locally here in Australia we have the Australian Capital Territory also called ACT which is where our capital Canberra is. Every property here is 99 year leasehold from our federation date of 1901. There is no freehold. .........................Properties are brought and sold as if they are freehold irrespective of the amount of lease left. .........................On a practical basis the banks had to adopt a policy of lending on same as if being practical freehold. New 99 leases are re-newed on a token payment of $1..................................... Technically PE is absolutely correct, however, if it is a leasehold with 99 years to run then I would offer that given the time frame there would be no measurable differance between leasehold and freehold for a 99 year lease. I would and have used straight comparison freehold sales to support a leasehold valuation where it was 99 year leasehold. Otherwise the value is adjusted Pro Rata downwards depending on the amount of time left on the lease. (All things being reasonably equal) At all times in the preparation of a leasehold valuation it has to be stressed the dynamic TIME is VALUE factor as the lease is used up. Bankers can tend to forget this. .........................................Now having said all that please check with a local mentor appraiser to confirm if you can undertake such an appraisal, that there is nothing in your state appraisal registration to prevent same and that a leasehold appraisal is acceptable as security documentation for an FHA loan.

 

[Pittsburgh Pete]

It it is a 99-year lease, there should be minimal if any difference--depending on the nature of the lease payments however.

Unless bank is making a loan with a 100-year term, shouldn't be any difference.

Looking at it from an income perspective, the reversionary value at the end of the lease term will be minimal but so would any interest 99 years down the line.

 

[Mr Rex]

What if its a 99 year lease with 1 year remaining?



By chance is this reservation land? If so, FHA has a special program.

 

[Ken B]

If the land is owned by a community land trust, there are also special considerations.

 

[RSW]

The FHA will insure a loan on a property with the following requirements which is taken from the Lender's Guide To Single Family Mortgages (05/2009):

4155.2 4.1.f
Property
Eligibility for
FHA Insurance

Only one to four unit properties, including a one family unit in a
condominium project, are eligible for mortgage insurance, except for
mortgage insured under Section 220 of the National Housing Act. The
mortgage must be on real estate held

• in fee simple
• on leasehold under a lease for not less than 99 years which is renewable, or
• under a lease having a period of not less than 10 years to run beyond the
maturity date of the mortgage.

For properties processed under the HECM program, the mortgage must be on
real estate held

• in fee simple
• on leasehold under a lease for not less than 99 years which is renewable, or
• under a lease having a remaining period of not less than 50 years beyond the
date of the 100th birthday of the youngest mortgagor.

 

[Delta85]

Thanks for the feedback everyone.