Leasehold Versus Fee Simple Adjustments

[SmilingDog]

Here's the basic scenario:

Area has a mix of leasehold (under 5% of total properties are leasehold) and fee simple properties. Therefore, I'd have to use a combination of both types and make adjustments due to lack of recent sale (only 2 leasehold listings)...

The subject has a buyout of the leasehold approx. $100k


What is most appropriate:

*** adjust the fee simple properties down by $100k (the amount of the subject's buyout) in the sales grid?

or

*** adjust the fee simple properties based on an extensive paired sales analysis that results in variances between leasehold and fee simple proeprties in sale prices of approx. $30k?



The paired sales analysis would be more extensive, researching sales trends for at least the past 2 years, but I feel would result in a more credible report. However, the attorney (for which this is for) is going to see this and compare it to another appraisal that used the first simpler method.


Any advice from the gurus?

 

[Ron Runyon]

I agree with the paired sales analysis. The amount of the buyout, as your research suggests, does not relate to the realized impact on the market. It is like the adjustments some appraisers make when a subject has deferred maintenance and adjust the comps by the exact cost of estimated improvements...it is not the cost to improve or in this case the cost to buyout we are concerned with....rather the impact those issues have on the market. A quality paired sales will accomplish that.

 

[PropertyEconomics]

I think the real issue here that must be addressed first is what is the purpose of the appraisal and who is the intended user?

 

[SmilingDog]

I think the real issue here that must be addressed first is what is the purpose of the appraisal and who is the intended user?

Purpose of appraisal - determine market value as of a certain date.

Intended User - my client a lender.

 

[Zmcraney]

What's easy isn't always right. The matched pair analysis would be in my opinion the more realistic market reaction the difference in the ownership. How does the attorney fall into the mix if this is for a lender??

 

[Webbed Feet]

Is this a trick question and you are running a forum "Stupid" survey / contest sort of thing and seeing who all falls for it? If so, my advice would be to come up with a better trick question than that one!

P.S.. Oh, and why are you adhering to what are probably inappropriate SOW parameters in order just to suck up to some client that is probably making inappropriate comp demands due to the situation? If the fee simple properties would not normally be "comparable" why do they become "comparable" just because they are the only recent sales? If they are normally comparable, why all the fancy footwork to create such unusual adjustments? Why don't you just take recent sales of entire skyscrapers and use extensive paired sales to adjust those to the leasehold subject while you are at it? I mean that way at least there may be some element of leaseholds involved! ...

How does one say "turn a lending problem into an appraisal problem?"

 

[SmilingDog]

Webbed... you lost me...

 

[Webbed Feet]

Webbed... you lost me...

I don't really think so, but I'll bite.

If you had 50 "recent" sale comps of simliar leasehold properties would you use any of these fee simple properties in your analyses? If not, why? Afterall, they are comparable aren't they?

Or, if we are using them for the sole reason they now are somehow the "best" just what exactly is making them the "best?" What rule in USPAP or good appraisal practices makes what would be inappropriate sales "comps" to be considered to remotely be the "best" if only for no other reason than they are "recent?" If there is no such rule in USPAP or quality appraisal practices, where is this rule or demand for "recent" comps coming from? If we comply with such arbitrary rules or demands to the extent of using sales that we would never normally consider to be "comps" in the first place, has not a lending problem now been turned into an appraisal problem?

If in your market, and this was a private party assignment with no artificial requirement demands turned into rules regarding sales dates were involved, you would proceed to use fee simple ownership sales anyway, then my posts are meaningless. But, if lacking pressure to turn a lending issue into an appraisal issue you would only use older sales of leaseholds only, and say bring them forward with well supported time adjustments, versus very unusual and difficult leasehold to fee simple adjustments......., then I would say my post has meaning.

 

[SmilingDog]

The properties in question are ALL attached townhomes. Over the years they have been given an option to purchse the remaining leasehold. Most people did. There are only about 5% or less leasehold.

In a flat market where sales may be very, very few, and with no other similar types of properties outside this neighborhood area, then it might stand to reason that you would have to use Fee simple sales in spite of the fact that the Subject is one of the few remaining ones with leasehold.

The question therefore (as originally asked) is you could find paired sales analysis showing what the variance was between Fee and Leasehold of these otherwise model match sales (in terms of location, size, amenities, etc). Wouldn't that be the best method of providing a realistic market value?

Another appraisal has been done (by someone else) that only used Fee simple sales and simply deducted the buyout option amount. I do not think that such a simplistic approach is supported.

So I asked what would our peers do?

I believe that the Paired Sales analysis method is the most reliable, and uses real market data to support the conclusions.

 

[Webbed Feet]

Why would any tenant that already has legal rights to the leasehold estate need to purchase it? Technically, they already did. And we are comparing personal property rights to real estate rights?