Non-arm's Lengths Lease

[nchong33]

Dear Appraisers,
How would you treat a non-arm's length lease (between father and son) in a single tenant property appraisal? Would you appraised this as leased fee or fee simple? What is the general rule? Thank you for your insights in advance!

 

[Gobears81]

Leases like this usually terminate on transfer of ownership and the rents aren't typically market oriented. It might be worthwhile to check in with the client, but unless there is an unusual SOW, I'd appraise fee simple and discuss the lease terms in the report, as well as why it was not appraised leased fee

 

[Red Flint]

General rule on a lease is to acquire all of the paperwork and look carefully at the whole lease, and compare to other leases that you have for similar properties. If the term is 10 years with four 5 year rollovers and provisions for subleasing, then you likely have a leased fee holding to consider, and possibly a leasehold.

 

[nchong33]

Leases like this usually terminate on transfer of ownership and the rents aren't typically market oriented. It might be worthwhile to check in with the client, but unless there is an unusual SOW, I'd appraise fee simple and discuss the lease terms in the report, as well as why it was not appraised leased fee

Thank you for the info. When I asked my supervising appraiser, he asked a question 'will the lease survive the transfer?' I might be overthinking, but what can I say to that? I learned to call it fee simple in this case, but he thinks the lease SHOULD be given credit...

 

[Gobears81]

Thank you for the info. When I asked my supervising appraiser, he asked a question 'will the lease survive the transfer?' I might be overthinking, but what can I say to that? I learned to call it fee simple in this case, but he thinks the lease SHOULD be given credit...

I'm certainly not going to disagree with your supervisor without knowing all of the facts In general, a non-arm's length lease of this type has limited to no bearing on the valuation, but every situation is different. If you are not certain, all the more reason to communicate with the client, as they often know details that aren't disclosed until these types of questions are asked. Another option is to show both leased fee and fee simple - if contract rents deviate from market, calculating a property rights adjustment would not be an extended task. But I've obtained non-arm's length lease paperwork in the past that are valid leases but the rents are calculated either as just enough to pay the mortgage or some outlandish amount for tax reasons, and it is quite uncommon for most property types to see that transfer.

 

[Deleted member 152047]

Whether a lease might survive a sale is an important item to consider. Typically, in the past, if any uncertainty existed as to the arm's length nature or whether the lease would survive a sale; I would develop both the value of the fee simple and leased fee interests. You need to make sure to include the appropriate extraordinary assumptions. I typically do not utilize a hypothetical condition for the fee simple and simply add that it appears as though the lease is not arm's length in nature and may not survive a sale. I do include an extraordinary assumption for the leased fee interest value indication telling the reader that the value is predicated on the assumption that the lease would survive sale.

 

[NachoPerito]

The tenant and landlord are related so the lease is not arm's length. That would be my opinion on it.

 

[DREA Dean]

The tenant and landlord are related so the lease is not arm's length. That would be my opinion on it.

I agree with this in most cases. There are exceptions, however, depending on the strength of the tenant and likely survivorship of the lease if the property sells.

I have appraised a number of convenience stores that had leases between family members and the c-store chain, so not arms-length. The bank requested a value on the leased fee estate, however, and the leases are similar to those for other c-store locations (same chain) held by non-family investors. I include a statement that says:

"[Property owner] and [C-store operator] appear to be related, having the same address at [C-store operator] headquarters, but are separate legal entities. As instructed by the client (XYZ Bank), I am relying on the reviewed lease in determining the value of the leased fee interest, despite the evidence that the two parties are related. It is an extraordinary assumption that the subject lease is valid, in force and legally binding on both parties, and will be honored for the remainder of the lease term, whether or not the real property changes ownership."

 

[BRCJR]

Non at-arms-length lease at market rates.

 

[nchong33]

Thank you everyone!! You guys are extremely helpful