Leasehold vs. Fee Simple How do you adjust?

[christiek9]

Hello out there. I have a Leasehold fee interest home on an Indian Reservation. There are many sales within the reservation, however, of course, none similar to my subject. I have no choice but to go just outside of the reservation, however, they are fee simple. This reservation has a 99 year lease agreement from time of purchase/transfer, so no problems there. What is the calculation of value determination of the difference? I've heard 6%, 10% 15%??? Please help if you can. Thanks

 

[sputnam]

There are a number of methods you can use to extract adjustments from the market...including the market reaction to leasehold vs fee simple. If you don't know how to do that, then you need to associate with an appraiser who does.

 

[Restrain]

You have to stay in the reservation, as the market within a reservation is markedly different than off the reservation. There are restrictions who can buy, the fact that all properties are leasehold estates, etc. If you want to use off-reservation data for quality/style adjustments (comment to support the. Adjustments) that is acceptable, but, having reviewed these things, the rules require the use of on-reservation sales. And , no, you won't find this spelled out in the GSE regs. The lending regs for these loans are specific for each reservation.

 

[KHS445]

Compare the sales within (leasehold) the reservation and sales outside (fee simple) the reservation and determine the difference based on matched pairs. Obviously the more comparables you do this for the more accurate the adjustment. Be sure to save your work to back up your adjustments and to use as a starting point for future assignments.

 

[sputnam]

You have to stay in the reservation, as the market within a reservation is markedly different than off the reservation. There are restrictions who can buy, the fact that all properties are leasehold estates, etc. If you want to use off-reservation data for quality/style adjustments (comment to support the. Adjustments) that is acceptable, but, having reviewed these things, the rules require the use of on-reservation sales. And , no, you won't find this spelled out in the GSE regs. The lending regs for these loans are specific for each reservation.

I agree. That's a better approach. Use the crappy comps from inside the reservation and, if you need to, support adjustments with data from outside. Yeah, your line, gross, and net adjustments may be high.....so what? That's a lending guideline, not a rule....absolutely not a requirement of appraisal practice.

 

[Terrel L. Shields]

This reservation has a 99 year lease agreement from time of purchase/transfer, so no problems there. What is the calculation of value determination of the difference? I've heard 6%, 10% 15%??? Please help if you can. Thanks

You won't find any real difference so long as the lease has 99 yr to run and there is no land rents, and the way to calculate it is run a DCF...which will prove the "discount" to be so miniscule as to be invisible. The value of the reversion of the leasehold is so far in the future as to render a discount zero for all practical purposes. Land outside the reservation is a different animal and I would certainly look for sales inside the reservation even if I went back 3 years or more. A "discount" between in and out of reservation sales is likely more a location discount than attributable to the leasehold. Mention and go on.

 

[JasonHaskell]

Agree with Terrel. We have some 99 year land leases of cabins on BLM land here and there isn't a difference between those cabins and similar cabins on owned land.