New construction condo on land lease

[MBD]

Very difficult to find leasehold condos. As a matter of fact, I can't find any similar projects in the entire county. The last thing I want to do is to compare an age restricted (55 and older 2 story garden apts) to a 30 story highrise. Completely different buyer preferences.

I told the client that due to level of difficulty in finding outside comps, we should hold off on the appraisal until we have 3 closed sales within of similar style units. Ideally, they would agree.

However, I still would like to include at least one outside closed sale. I don't want to compare this to a fee simple condo, since leasehold is simply the right to occupy. I am thinking of comparing this to a co-op, since the proprietary lease also gives the "buyers" the right to occupy the unit. I found a couple of co-ops 5 miles away in similar market that are fairly new constructions as well (less than 10 years old) and the projects have similar amenities. I don't even think that an adjustment for interest conveyed is warranted because landlease and proprietary unit "owners" are simply subleasees.

The land lease begins on the date of first closing (03/12/2007) for 100 years, with each unit sublesee/owner responsible to pay $100 per month rent (included in the HOA charge) to the city, with a clause of one renewal for another 100 years. After the year 2107, the rent increases to $1,000 per month. There is no renewal of the land lease written in the condo docs after the year 2207.

Since the land lease ends in 2207, and we're basically looking at current mortgage terms that rarely exceed 30 years, is it justified to compare this to a fee simple condo with similar amenities, without an adjustment for property rights conveyed?

I am also thinking of a some kind of rental analysis, maybe the current GRM of similar units in the area, multiplied by the difference between market rent and ground rent?

Has anybody had a similar situation? How would the gurus deal with this situation?

 

[George Hatch]

You will probably have to find sales data that aren't on leased land and making an adjustment for the different property rights. It's not a simple solution but you gotta do what you gotta do. Think of it as job security.

 

[Otis Key]

Dang - y'all have some tuff assignments. I think I'll stick to the few PUD's that we have on leased land and the condo's on owned land. I bow out to George's suggestion. No help from the high desert.

 

[MBD]

You will probably have to find sales data that aren't on leased land and making an adjustment for the different property rights. It's not a simple solution but you gotta do what you gotta do. Think of it as job security.

The problem is figuring out the appropriate adjustment due to lack of land lease sales in the area. I know of a couple of other land lease condos, but they are in different market areas, with different styles of condos.

Is it a good idea to extract the difference from a different market area and apply it to the subject area?

 

[moh malekpour]

I have don leaseholds condos but I also had comps and I always was wondering what could I had done if I didn't have leasehold comps. I had plenty of condo projects in the area but they were all fee simple. My idea was that if I didn't have leasehold comps and I had to use a fee simple, I would get the present value of my subject lease fee and adjust my fee simple comparables for lack of that amount. I knew the montly lease fee, the duration and the term of the lease and the time of renewal for the lease fee on the lease contract. so, I could calculate how much money would be accumatled at end of lease term and discount it to present value.
Look at it this way. if the lease fee is $100 per month for 27 years, how murch money would be accumulated after 27 years if you put that money in the bank CD every month. When you get that figure, then you can find out what would the prest worth or value of that amout. It is called present value of the future income as the lease fee is an income for the lease holder. There is a formula for that calculation and I think the hp 12c can calculate it for you. If you don't have leasehold comps, that is a possible alternative.

 

[MBD]

Moh, I was thinking that same thought. But, how can we project what arket rent will be for the entire 200 years of this ground lease term?

My general idea was as follows: market rent approx $2,300 for this unit based on similar rentals in the area. The ground lease tenant for the subject pays $100 rent plus HOA charges until March 2107, then $1,000 rent plus HOA charges from March 2107 until 2207. I know this is crazy, but we could state a hypothetical condition of zero change in CPI, plus no change in HOA charge, property taxes, rents, property values, income, marketplace, etc.. for the next 200 years.

For easy math, let's say HOA charges and property taxes are $500 per month.

The sales price is $425,000. The buyer is paying $425,000 for the right to rent the unit for $600 per month until March 2107 and $1500 per month after that until March 2207. Combined rent plus HOA fees plus taxes is $720,000 plus $1,800,000. The average monthly rent for the next 200 years will be $1,050.

For easy math, let's say market value for an (all else being equal) fee simple condo is $805,000 (I didn't research this yet, I'm just stating this as an example). With market rent of $2,300, that's 350 GRM.

$2,300 minus (average monthly rent) of $1,050 is $1,250. Multiply $1,250 by the 350 GRM to derive the value via income approach.


Too many thought processes...can't compute...my head is about to explode.

 

[Mike Boyd]

Or, at an average rent of $1,050 for 200 years you would be paying $2,520,000 for the use of the land. Of course, before that time comes humans will all be living in some kind of a vacuum tube so I guess it does not matter.
I would say to use the projected economic life for all calculations rather than the lease terms.

 

[Fred]

Since the land lease ends in 2207,

and what is the remainng economic life of physically similar buildings owned in fee simple?

Other than excess fees (the pro rata share of the land rent), what other difference do you think there is that the market reognizes in pricing?

BTW, this isn't really a "condo" is it? Those who reside in the units have the same rights as any other tenant, the same rights Starbucks or Bed and Bath does in the local mall?

ground lease tenant for the subject pays $100 rent plus HOA charges until March 2107,

So, isn't the "adjustmet" basically $100 per month capitalized?

 

[Mike Garrett RAA]

For what it is worth, we have two such complexes here in Colorado Springs that I know of (there might be more but have never appraised any of them). Little, if any, real difference in value when compared to condos on fee simple land. Since a condo owner really doesn't own the land under the unit but rather a undivided interest in the complex, most probably wouldn't perceive the difference.

Since you have no other sales of condos on leased land in your market area, I would attempt to obtain some sales from similar markets even if they were out of state that would indicate either a difference in value or no difference in value. These could be included in your appraisal report as additional comparables.

In any event, you have just entered into a "complex appraisal assignment", be sure your license level is sufficient for this type of assignment.

 

[moh malekpour]

Moh, I was thinking that same thought. But, how can we project what arket rent will be for the entire 200 years of this ground lease term?

200 years lease is a very bad lease. It is a 2 century lease and may take 3-4 generations. I didn’t know that the lease term for leasehold could go that long. I am not sure but I think the maximum lease term for leasehold estate is 99 years which is based upon the common law concept known as the Rule Against Perpetuities which is designed to prevent property from being tied up and controlled for too long from beyond the grave. 200 years lease seems strange and unusual to me.