Leasehold value for Single Family

[Paulm]

I have an assignment to appraise a single family on leased land. Length of lease is 99 years with monthly rent of $50. I did some research on how to value and came up with this technique. Have never done one of these and just wanted to make sure I am following legitimate appraisal practice. Value of leasehold can be calculated by multiplying market rent minus monthly lease amount by appropriate GRM. Does this make sense?

 

[J Grant]

Is it a fannie use lender appraisal? If it is, Fannie has their own propietary requirement formula to use for valuing leasehold if it is a CRA ( community Redevelopment Agency owned lease on the land ) if not CRA not sure if still needs be done by their formula ( which you can look up via Fannie guidelines for CRA /valuing a leasehold with a land lease. ...

 

[Meandering]

Fannie also requires "experience" doing something new,

Unless of course, if something "new" was dictated by their ivory tower.

Other than that, you need a mentor with experience to work with, and approval from your "clients" to proceed.

 

[Financially Feasible]

I have an assignment to appraise a single family on leased land. Length of lease is 99 years with monthly rent of $50. I did some research on how to value and came up with this technique. Have never done one of these and just wanted to make sure I am following legitimate appraisal practice. Value of leasehold can be calculated by multiplying market rent minus monthly lease amount by appropriate GRM. Does this make sense?

My bold.

That general approach doesn't offend me... but there is that whole "appropriate GRM" thing...

Outside of @J Grant's advice (which I don't doubt is sound)... I would consider an IRV box.

*Determine the value of the entire property (Vo)
*Determine the market rent of the entire property (Io)
*Calculate the implied GRM of the entire property (Ro)
*Your ground lease contract rent is a plug (IL)
*Determine the value of the site as if vacant (VL)
*Calculate implied GRM of the site (RL)
*Stop right there (for a second)

While it would be easy enough to calculate the LH by deducting VL from Vo, that doesn't take into account any above/below market ground lease impacts. So, you can test two of your key assumptions (RL and IL), assuming that such data is available (i.e. ground lease rent comps for testing IL... or GRM comps for testing RL... which would also allow you to test IL). If you detected an above/below market lease rate, you would subtract/add the NPV of the ground lease differential to the LH value (at least... I'm calling "LH value" as Vo - VL... as both are assumed at market). Of course... there is that whole thing about determining a market-oriented yield rate for an above/below market ground lease... but hey... I ain't got all of the answers. That being said, if you determine that the contractual ground lease is at market levels then there is no above/below to consider... and LH (or Vb) = Vo - VL.

Also, I'm sure that the lender (assuming that this is for financing purposes) would be REALLY keyed in on the effective age/remaining economic life opinion as lending there is literally no reversion to the improvements (assuming a typical economic life with no major capex improvements made during that time). Said differently, if the lender is trying to structure a loan with a 25 year amortization and the REL is 20 years... well... do not pass go; do not collect $200.

Happy Friday!

 

[J Grant]

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Not found

selling-guide.fanniemae.com

 

[Red Flint]

An estimate, assuming $50 per month is a reasonable market expenditure, and using typical ground lease cap rates of 5 1/2 to 6% for national credit tenants of 30-50 years term length, apply IRV, $600/.0575 ~ $10,000, subtract from fee simple. Compare this method to using sales comparison approach of selecting similar house sales restricted with 99 year leases, this is a common parcel type on Indian land, although lease costs are usually nominal - like $1 per year, but need tribal tie for lease approval.

 

[Howard Klahr]

Value of leasehold can be calculated by multiplying market rent minus monthly lease amount by appropriate GRM. Does this make sense?

Yes this is a valid method/technique, however, the GRM used is derived from leasehold properties and is NOT a typical GRM derived from fee simple properties. Basically the appropriate multiplier is a land rent multiplier not an overall rent multipler

 

[CANative]

Yes this is a valid method/technique, however, the GRM used is derived from leasehold properties and is NOT a typical GRM derived from fee simple properties. Basically the appropriate multiplier is a land rent multiplier not an overall rent multipler

"Selected from a range of x to y?"

* Waiting for "the call."

 

[Howard Klahr]

"Selected from a range of x to y?"
* Waiting for "the call."

Not quite but this is why competence is required when performing appraisal assignments

 

[CANative]

Not quite but this is why competence is required when performing appraisal assignments

I was being snarky.