Leasehold Interests

[Keith Irish]

I have an assignment to appraise a 2.2 million dollar property in Southern California and the borrower has a leasehold interest in the property for 99 years. There are 63 years left to the lease agreement. The owner in public record is, for talking purposes, spelled out in a similar fashion to "Corporation LLC/Borrower Lessee".

How does one appraise the rights to the property if it is a leasehold interest for 99 years? Is there an automatic deduction of value being that it is not fee simple? Does the value of the leasehold interest depreciate as the lease ages?

The lender has told the agent for the re-fi that the 1004 form is required and that one leasehold comparable sale is also required.

I use MLS Alliance and RealQuest for my databases for real estate data, but there's doesn't seem to be a method to search for only leasehold properties. I’m assuming I’ll just have to pull a list of properties, sort through them one by one, and see if any of them look like they might be a leasehold interest. The only indication that I had from RealQuest that this was a leasehold ownership was that the owner had the word “lessee” in it.

Has anybody here appraised a leasehold interest? Can you help me? How would you go about getting started? I told them that we’d need a copy of the lease agreement.

Also, on a side note…..Is condominium a fee simple or leasehold? I’ve always had troubles simply defining leasehold verses fee simple. To me a condo would be more of a leasehold situation as you have an undivided partial interest in the common areas.

Thanks!

Keith

 

[Meandering]

Condos

Condos are fee simple interest in the unit and a _% undivided interest in the common areas. The declaration of the condominium complex should spell out the % of undivided interest per unit. I have appraised several condominium units and an entire complex. My experience has been that the % interest in the common areas is based on the size of the unit and is used to determine the condominium fees. I have found to be true with both commercial (medical) condos and residential ones. Anyone have anything different?

 

[xm39hnu]

Leaseholds have value only if their contract rent is below market rent. You've got a detailed lease analysis to do in order to determine contract rent. This can involve sinking fund factors, stabilized rent components, and a gazillion other things. Or it can be as simple as $9.95 per month plus tax. Read the lease. What does it cost the leasehold, per year, to maintain the lease? Compare that against market rent.

If the contract rent is equal to or above market rent, you're finished with the lease part. Its value is zip. If it is below market rent, you have to calculate the present value of the difference applied over the lease term. To do that, you need to determine the correct method of capitalization first. Direct cap or yield cap? You can use either one, since you have a defined holding period. Is there any reversion at the end? Any exit expenses, such as an environmental certification?

Also, what happens to the improvements at the end of the lease? Do they revert to the landowner? If so, you've got a wasting asset, which warrants a higher cap rate.

I sure hope you've got some leased-land comparables to provide guidance.

Get the idea? This is complex, and depending on your own experience base, you may want to consider getting a CG with lease experience to help with it.