How do I appraise properties secured by a leasehold estate?

The appraiser must obtain a copy of the lease from the Mortgagee and must analyze and report the terms of the ground lease, including:
  • the amount of the ground rent, 
  • the term of the lease, 
  • if the lease is renewable, 
  • if the lessee has the right of redemption (the right to obtain a Fee Simple title by paying the value of the Leased Fee to the lessor, thereby cancelling the ground rent), and 
  • if the ground rent can increase or decrease over the life of the lease term. 

The appraiser must estimate and report the value of the leasehold interest using the calculation below. The appraiser must provide support for the capitalization rate selected.  Calculation of the Leasehold Interest Formulas:
  • Value of Leased Fee = Ground Rent / Capitalization Rate
  • Value of Leasehold = Value of Fee Simple – Value of Leased Fee 

In valuing the leasehold interest, the appraiser must apply the appropriate techniques to each of the approaches to value included in the analysis.
  • In the cost approach, the value of the land reported must be its Leasehold Interest.
  • In the GRM income approach, the sales used to derive the GRM factor must be based on properties under similar Ground Rent terms (or be adjusted to similar Ground Rent terms).
  • In the sales comparison analysis, the comparable sales must be adjusted for their lack of similarity to the subject in the “Ownership Rights” section of the sales adjustment grid. 
For additional information see Handbook 4000.1 II.D.7.c.  at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh
 

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04215