Leasehold value in 99 yr lease

[skijoring]

My client ( a municipality) purchased a large ranch to protect some historic buildings. They purchased the ranch subject to a restrictive conservation easement that eliminated subdivision and multiple residential use but did specifically provide for public access. They want to lease it to a public agency that will provide recreational access that is consistent with the easement. THey want to structure the lease as a 99 yr lease with the right to renew (?) and in a manner to create a present value lump sum payment nearly equal to what they just purchased the property for.

If the recent purchase is evidence of the overall value and they can create a scenario where leased fee value is nominal (I don't know how they are going to get around consideration of the reversion) is the calculation of the leasehold estate essentially the overall value or is this contrary to USPAP 104(e) (value of the whole not equal to the parts consideration)?

 

[Boonders]

Consideration of the reversion? Hmm...what's the PV of the reversion after 100 years, discounted at 10%....

FS isn't equal to LF + LH. You have to estimate the value of each separately and not sum or deduct one from the other. The leasehold should be valued on its own.

 

[Howard Klahr]

You may want to look at leases issued by the Army Corps of Engineers, the National Park Service and the department that oversees State Parks in your area. These leases are obviously focused on recreational properties/uses, are typically based on a percentage participation basis with an offset of capital improvements.

This may be the lease structure for which your client is looking.

 

[PropertyEconomics]

Calculate the reversionary value of the improvements at the end of 100 years as your starting point .... then you can calculate the amount of income necessary to provide a current value indication that equals what they paid ... at that point you have the rental income necessary to meet your clients "INVESTMENT" criteria .... this isnt an appraisal for value but rather for "investor" required rental amounts. I think ....

 

[skijoring]

The light bulb just turned on! Thanks for all the information, it was very helpful.

 

[Boonders]

using "investment" criteria, would indicate an "investment value" versus "market value" using market criteria.

 

[PropertyEconomics]

using "investment" criteria, would indicate an "investment value" versus "market value" using market criteria.

Yes this is Investment Value .... where the value is given and the appraiser needs only figure out what income stream and reversion calculates to that value. Definately an investor driven analysis.

 

[Howard]

It's all about rights and who holds them isn't it?

Your client purchased a property, which itself was subject to a CE, so they don't hold Fee Simple. Someone else holds development rights or whatever else was taken away by the CE. That someone else may also hold the means to enforce certain actions on the property, such as a management plan, on the property. Does the holder in fee, subject to the easement, have to maintain those historic buildings? I hope they figured that out going in.

All they can lease is what they have to lease. On a 100 year deal, at almost any discount rate, the PV of the reversion is nominal (and who is to say what that is anyway. Answer: me! Pay me $10,000 and I'll tell you what the reversion will be in 100 years, then let's wait around to see if I'm right!).

So a lump sum payment of what they just paid is essentially transferring their rights in the property to the care, use and enjoyment of another agency, assuming what they just paid is in fact, Market Value for the rights they acquired. Sum of the parts should not exceed the whole, but PV of the reversion is nominal, so the leasehold is essentially equal to the Leased Fee.

Other than this being a one time lump sum payment vs. an annuity, this is not that much different from the 50, 80 and 100 year leases the Railroads granted to encourage development along rail lines. Those were at fixed, nominal lease rates. Also, not unlike "leases" of ranches, when the part being leased is from the Forest Service, BLM, etc. Note, these latter leases do allow public access, whereas private leases of similar land do not, and there is a difference. Inviting the public onto the property means they are allowed to share in the use and enjoyment of the property, meaning the public now holds some of the rights. When these leases on government lands transfer, they are essentially transferring a leasehold interest, but even so, these government ranch leases are a different breed of cat than the RR leaseholds or even private ranch leases. You might find a "similar" in there somewhere.

I hope your client knew and understood all this before then agreed to buy the ranch. That they fully understood all the pluses and minuses.....the benefits and liabilities. If not, what they may be engaging in is wishful thinking that they can get all their money out of it.