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Life Estate in an apartment project

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George W Dodd

Thread Starter
Senior Member
Joined
Jul 9, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
Sale conditioned on owner retaining life estate in one unit plus purchaser is to construct a two car garage and deck for use by life estate.

Market rent for the unit is $475/month
Age is 75 yrs with life expectancy of 10.7 yrs
Discount rate of 7%
Cost to construct garage/deck is $30,000
Market rent for Garage $50/month.


I'm being told that: "The $5,700 is 1.87% of Gross Income. The value of the Income Approach, disregarding the construction of the garage and life estate, is $2,332,000. Based on 1.87% of $2,332,000, the indicated value of the unit is $43,608. The cost of the garage and deck is $30,000. The total contributing value of the unit, garage, and deck is $73,608. The life expectancy of 75 yr old male is 10.7 years. Discount rate is 7% (low risk). By discounting $73,608 at 7% for 10.7 years, the indicated pv is $35,671. The value used in the calculations of Income Approach was $43,608. By deduction $35,671 from $43,608, the indicated difference is $7,937 or rounded to $8,000.

Then: Indicated Capitalized Value by the Income Approach: 2,332,000
Deduct for Life Estate: 8,000
Indicated Value by Income Approach: 2,327,000"

This doesn't make sense to me and I'm finding it difficult to accept the $8,000. Any help or comments would be greatly appreciated.
 
Last edited:

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
Based upon your illustration, the value of the life estate is $35,671. The $8,000 is the present value of the anticipated reversion/remainder.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
Why not exclude the apartment rent, for you really dont know how long it will last and deduct the cost of construction based upon a recapture .. (reduction in income) over say a 10 year period?
 

Boonders

Junior Member
Joined
Oct 31, 2006
Professional Status
Certified General Appraiser
State
Iowa
interesting job. Never seen a life estate used like that before.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
Im curious about the remaining life .. how was that determined?
 

George W Dodd

Thread Starter
Senior Member
Joined
Jul 9, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
I've not encountered a life estate as part of an apartment project before, but the method that is being suggested just doesn't make sense to me.

The value for this property is income driven. In addition to the loss of market rent, there are other costs that the property will incure. Such as maintenance, water and sewer fees, taxes, insurance, etc. for this unit.
The cost of the garage is another concern. It is unlikely that the value is equal to its cost. Rather its contributory value should be based on the income it could produce or maybe as a one time expense.

I've been thinking the same about excluding its rent from income as one way of dealing with it.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
I've not encountered a life estate as part of an apartment project before, but the method that is being suggested just doesn't make sense to me.

The value for this property is income driven. In addition to the loss of market rent, there are other costs that the property will incure. Such as maintenance, water and sewer fees, taxes, insurance, etc. for this unit.
The cost of the garage is another concern. It is unlikely that the value is equal to its cost. Rather its contributory value should be based on the income it could produce or maybe as a one time expense.

I've been thinking the same about excluding its rent from income as one way of dealing with it.


I agree with you George .. all incomes should be excluded and expenses included. I would think the one time cost of the garage should be excluded or a dcf using the cost experiened in the first year ... its essentially the same as a one time deduction. And I would definately not include any income from the garage.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
George .. why not do a dcf ... recapture the expense of the garage first year, include income last year of dcf ... 11 years .... and discount all to a present value.
Even your overall rates would not measure the life estate as you are contemplating it.
 
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