Leasehold Versus Fee Simple Adjustments

[SmilingDog]

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?

Because they can .

 

[PropertyEconomics]

And how much longer does the lease run? I see no mention of that.

 

[SmilingDog]

And how much longer does the lease run? I see no mention of that.

They vary from 25 to about 35 remaining years. The Subject leasehold lasts another 31 years.

 

[PropertyEconomics]

They vary from 25 to about 35 remaining years. The Subject leasehold lasts another 31 years.

And the buyout is $100,000?

 

[TJSum]

What is the yearly lease payment?

 

[Howard Klahr]

Why would someone pay $100,000 today versus continue to make payments for the next 25 to 35 years? As already asked, what is the contract rent payment? It must exceed $238 - $333/mo without any discount associated with a lump sum payment.

If what you really want is proper advice to your situation, you need to provide all of the appropriate details. Completely explain the contract terms.

 

[Webbed Feet]

Because they can .

No, you misunderstood me. The tenant already owns the leasehold estate! The only thing they could purchase would be the leased fee. The leasehold is a less than freehold estate. The tenant does NOT own the property, but only has a right to exclusive possession for a specified period of time. Quite honestly, it is not yet completely clear if your assignment involves the leasehold or the leased fee. And as posters are starting to head in the direction of asking what the specific terms of the lease are, I join them in that.

If your assignment is to value the leasehold, and as was the other appraiser if so, you're both off in la la land. The value of the leasehold is tied to the differences between market rent and the contract rent. If the contract rent exceeds market level, the leasehold could have negative value. To have value the remaining lease term has to be long enough to be marketable, the lease has to alow for subletting or assignment, the contract rent should be below market rents.. I don't read adjusting by a offered $100,000 buy out against Fee Simple or paired sales from Fee Simple properties remotely properly considering any of that. With 32 years left the value of the leased fee remains also tied to an income stream analyses unless we have an assumption the tenant is willing to sell the lease rights they have back to the leased fee owner, and properly done me thinks that still involves an income approach if the contract rent is under market rents and the leasehold has value.

Maybe I have no idea what estate you are appraising. But it looked like the leasehold estate. So you if you don't have any recent "sales" of leasehold estates, and not having any details regarding the lease, the contract rent, and the market rents, I would have to expect the primary approach to value would be income analyses, not sales of fee estates just because they are recent.

Generals, am I anywhere in the ball park or a duck with no wings on this one?

 

[PropertyEconomics]

I can tell you with no escallation clauses, and lord only knows if there are any or not, a $100,000 31 years from today is worth a hell of a lot less today if one were to consider the time value of money.
Assuming, I can pay $100,000 today or $100,000 31 years from today, I can assure you that I am not going to pay today, unless as Howard notes, the monthly / annual lease payments can justify such a purchase.
Webbed is also correct in that comparison of a fee property (with the total bundle of rights) against a leasehold property (lacking the bundle of rights) is not prudent. And one cannot simply take the fee simple value, minus the leasehold value, and come up with the leased fee value .. which is what the purchase would be of.

Fee Simple as we all know .... is the total bundle.
Lease Hold ... represents the interest of the holder of the property by lease (ie the occupant lets say in this instance if in fact they are the owner of the leasehold position aka the leasehold tenant)
Leased Fee ... represents the interest of the lessor who has "Leased" their "Fee" position in the land to someone else.

The $100,000 would represent the buyout of the Leased Fee position as the property is already held by lease by the occupant / leasehold tenant (again assuming this to be correct).

I would say it is impossible to do any analysis unless you know the exact terms of the lease, monthly / annual amount of rent of the underlying land, any escallation clauses, prepayment penalties, the current value of the leasehold position ... all would be necessary in order to make a prudent decision on behalf of the lease hold tenant.

Its not simply as easy as has been presented, and unless you have a tremendous amount of data, simply comparing leasehold sales to fee simple sales will probably not get you the answer you need .. and IF you have a tremendous number of sales .. comparison with fee simple properties is not necessary.

Im also still confused why we have both an atty and a lender here as the client ..... more needs to be disclosed.

 

[timd354]

I would say it is impossible to do any analysis unless you know the exact terms of the lease, monthly / annual amount of rent of the underlying land, any escallation clauses, prepayment penalties, the current value of the leasehold position ... all would be necessary in order to make a prudent decision on behalf of the lease hold tenant.

Not only that, but the appraiser needs to know the applicable state and local laws are regarding residential leaseholds. For instance, 99 year perpetually renewable residential leaseholds are very common in Baltimore, MD and Maryland state law regarding residential leaseholds mandates that the lessee in most residential leaseholds has the absolute right to purchase the lessor's interest in the leasehold and receive a fee simple title to the property based on a 1 time payment based upon a capitalization rate of 6%. The OP needs to make sure that his state does not have a similar as such a law obviously affects the value of the leasehold.

 

[Webbed Feet]

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?

Going back, and after having traveled the thought process of all of this, the above really explains why I immediately wondered if the above was some trick question or if this was a stupid contest.

The above is completely confusing and makes no sense. We need to know the assignment here and the intended use. It is not clear at all if you are appraising a leasehold, the leased fee, or a hypothetical sale of the leasehold back to the leased fee estate owner again creating a Fee Estate.

You say above that there is a $100,000 buyout of the leasehold. That is saying it is costing the leased fee owner $100,000 to purchased the lease back. The real issue here is you are thinking in terms of a "Subject" being the improvements when you post, and any appraiser working on this absolutely has to think of the "Subject" as being whatever estate is being appraised, not the building.

Given the way the terminologies in the first post are used, the post makes no sense. One has to immediately ask why the SCA is even the primary focus when probably the primary focus should be an income approach. Perhaps I am not thinking of something here, but my reaction at the moment is there is no way any appraisal of the leasehold, the leased fee, or even a hypothetical rejoining of them should involve some sort of strange mix of leasehold estate sales and Fee Estate sales. The leasehold could only be compared to leasehold sales, an income approach, and the income approach should in most cases not be taking second fiddle to the SCA. That is why a lender demand for "Recent Comps" is a stupid lender making a lending issue to be an appraisal issue when it is not an appraisal issue if the comps are recent or not. The Leased fee should be mainly an income approach as who would purchase the leased fee based on anything other than rental income for a "Market Value" definition of value? A hypothetical rejoining to opine market value of a hypothetical Fee Estate would mainly use just those Fee sales and none of the leasehold sales at all!

An appraisal of a leasehold is an appraisal of personal property, an appraisal of a lease contract, not an appraisal of real estate! The value of the contract is affected by the possessory rights to real estate, but it is still the value of the contract that is at issue. How do we come up with that, using sales of Fee Estates supposedly as some better approach to some other that was used, to answer your questions when we have no information regarding the contract?