Seperating Land to get Imp Value

[jwalters]

In our jurisdiction we have Improvements on Possessory Rights (IPR's). This is where the state owns the land and another private party owns the improvements (shopping centers, offices, apartments, etc). The land is leased for a long period of time, say 99 years. At the end of the land lease period, the imps revert back to the state.

The taxes are levied on the imps only. What are appropriate methods of seperating the land and imp values? We suggested expensing out the land lease amount in an income Direct CAP analysis and assumed the land lease was at market. Would this leave only the imp value? Would the CAP rate change? I am trying to find the imp value only.

Is there an appropriate sales comparable method to seperate the values? Could you mix methodologies? Thanks

 

[hastalavista]

In our jurisdiction we have Improvements on Possessory Rights (IPR's). This is where the state owns the land and another private party owns the improvements (shopping centers, offices, apartments, etc). The land is leased for a long period of time, say 99 years. At the end of the land lease period, the imps revert back to the state.

The taxes are levied on the imps only. What are appropriate methods of seperating the land and imp values? We suggested expensing out the land lease amount in an income Direct CAP analysis and assumed the land lease was at market. Would this leave only the imp value? Would the CAP rate change? I am trying to find the imp value only.

Is there an appropriate sales comparable method to seperate the values? Could you mix methodologies? Thanks

If I understand you correctly, you are trying to value the leasehold.
If I am right, then the two methods would be sales and income approach using similar properties.

 

[Terrel L. Shields]

What does the lessor charge? If it is a $1 per 99 yr. lease, then a benefit accrues to the lessee... .So a portion of the total property value relates to the value of the leased fee less the actual rents.

If you need only the improvement contribution, then perhaps you could do a building residual analysis. What would the actual land value be? What is an applicable land cap rate be? Allocate that part of the income needed to service that cap rate to the land and the remaining income is that belonging to the improvements.\

The cap rate for land and the cap rate for improvements are rarely the same

 

[The Warrior Monk]

The taxes are levied on the imps only.

What is the purpose of this appraisal...is it for fighting the tax assessment?

 

[CANative]

An entity would purchase this property with the anticipation of the income that could be produced over the period of time. The real property reverts back to the jurisdiction. Cap the income attributable to the improvements.

Here's a link to California's handbook for valuing taxable possesory interests. I'm working on one now. What you need is in this handbook. Mine is more complicated than yours because there are many non-tangible sources of income and the possessory interest lease has been renegotiated several times with the net result of reducing days of possession.

http://www.boe.ca.gov/proptaxes/ahcont.htm

 

[Kali the Boston Terrier]

If I understand you correctly it is the Improvement you are looking to value because the land is owned by someone else. So it is truly a leasehold improvement allocation. The first and most popular method would be to value the entire property via the income approach, the next step would be to find market sales of land leases to derive the land capitalization rate....essentially the overall cap rate is the summation of the land and building. So if you have the land rate and overall rate then the remainder is the building rate. Take the income used for the total property in the overall income to the building cap rate...voila.

You could also do a land residual technique, or you could use a modified allocation like above using the reciprocal of the remaining economic life to derive a building cap rate...

However these are all just mathmatical gyrations, very few of these are actually used by real buyers and sellers...they do however get you to a place in the absence of sale comparables. But I would not hang my hat on them if I were going to defend myself in tax court for faulty assessments.