Appraising Special Ownerships and Interests

Basic Real Estate Appraisal: Principles & Procedures – 9th Edition

© 2015 OnCourse Learning

Chapter 17

STUDENT LEARNING OUTCOMES• List at least Four Less-Common types of

Homes; Define Each; and Explain What Special Problems Each Presents to the Appraiser• Define several Commonly-Marketed Types

of Partial Interests• Explain at least Three Ways in Which the

Appraisal Process is Different for Eminent Domain Appraisals 2

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17.1 CONDOMINIUMS AND OTHER SPECIALIZED HOUSING

Condominiums• Airspace + Interest in Common Areas• Restrictions• Homeowner’s Association (HOA)• Conditions, Covenants & Restrictions (CC&R’s)• Appraisal of Condos• Emphasize the Sales Comparison Approach• Consider Location, Amenities & HOA Dues 3

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PLANNED UNIT DEVELOPMENTS (PUD’s)• PUD’s originally based on a zoning concept

that allows flexibility in subdivision design• Ownership in the Fee Interest in the

individual lot, plus a shared interest in the common areas• Townhouse Styling is Common (but also

detached homes, zero-lot-line homes, etc.)• Appraisal Issues are similar to Condos, but

the Cost Approach may be applicable4

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COOPERATIVES

• Ownership• Shared Percentage in the Cooperative Association• Right to Occupy a Specific Unit• Right to Use of Common Areas• Approval by Other Owners Required?• Appraisal Considerations• Available Financing (may be limited)• What Transfers in a Sale? Equity Only?• Consider Market Acceptance

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VARIATIONS IN HOUSING DESIGN

Row Houses• Located on Individual Lots• Usually owned in Fee• Lack Side Yards (May share a party wall)• Problems include lack of privacy and

protection from fire (from adjoining unit)

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HOUSING DESIGN (Con’t)

Townhouses• Similar to Row House in Lack of Side Yards• Townhouse name applies to Building Style• Ownership to Fee Interest, plus Shared

Interest in any Common Areas (PUD or CID)• HOA usually exists (for common area and

exterior maintenance purposes)• Legally similar to a PUD

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HOUSING DESIGN (Con’t)

Zero-Lot-Line (Patio) Homes• Small Lots; Lacks Conventional Side Yards• Patio area often abuts wall of home next

door; faces a windowless wall for privacy• Orientation for specific homes may differ

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VARYING CONSTRUCTION TYPESManufactured Homes• HUD Classification of Mobile Homes built after 1976,

built to specific standards• It is a Housing Unit capable of being Moved• State Laws Differ as to Whether it is considered Real

or Personal Property• Structure and Foundation must meet Strict Standards

to Qualify for HUD / FHA Loans (Look for HUD seal on outside)• Appraisals based mainly on the Sales Comparison

Approach 9

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VARYING CONSTRUCTION TYPES (Con’t.)

Modular and Prefabricated Homes• Both are forms of Factory-Built Housing;

designed to reduce labor costs and time•Modular homes resemble mobile homes,

but without running gear & towing assembly• Prefabricated homes and components are

commonplace in conventional construction

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17.2 PARTIAL INTERESTSInterests Created by a Lease:• Leased Fee• Leasehold• Sub-Leasehold

Other Partial Ownership Interests• Life Estate• Undivided Interests in Commonly Held Property• Mortgaged Property• Time-Share• Easement

Detailed on slides that follow11

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LEASED PROPERTY INTERESTS

Leased Fee• The Owner’s Interest in the PropertyLeasehold• The Tenant’s Interest in the Property

In theory – the combined value of the two interests are generally considered to equate to the value of the whole (Fee Simple Interest) – but not always!

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WHO GETS WHAT?

Terms & Types of Leases• Time Period of Lease – Expiration? Options?• Rent Pattern – Flat, Step-Up, Percentage?Responsibility for Expenses (Who pays What?)• Gross Lease = Landlord pays all operating expenses• Net Lease = Tenant pays all operating expenses• Variations = Modified – Split or Shared

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VALUING LEASE INTERESTS

• If the Lease Terms (Rent) are Favorable to the Tenant – the Value of the Leasehold can be measured or estimated by:• Measure Favorable Rent Difference between

Market Rent and a lower Contract Rent• Apply an Annuity Capitalization Technique to

Discount the Favorable Rent over the Term of the Lease to indicate a Present Value Estimate

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VALUING LEASE INTERESTS (Con’t.)

Most Common Appraisal Problem is to estimate the Value of the Leased Fee…• The Value of the Property Subject to the Lease• Apply an Annuity or Yield Capitalization

Technique to Estimate the Present Value of Income Stream over the Term of the Lease; plus• Estimate the Present Value (PV) of the Reversion

at the end of the Lease Term• Leased Fee = PV of Income Stream plus PV of

the Reversion.15

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VALUING LEASE INTERESTS (Con’t.)

An Alternative to the foregoing Method of estimating the Value of the Leased Fee…• Apply Theory that the Combined Value of the

Leased Fee and Leasehold Interest = Fee Simple• Assuming this to be true…

Undivided Fee Simple - Leasehold Value Leased Fee• However, this may only be true in some cases

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VALUING OTHER PARTIAL INTERESTS

Mortgage Property• A Combination of the Lender’s Interest and the

Borrower’s Interest (Equity Interest)• A number of Capitalization Techniques can be

used to estimate one or both interestsTime-Share Ownership• Sales Comparison is complicated by issues

associated with time of year (seasonal), length of time, frequency (every year or every other year); and specific amenities of units, views, etc. 17

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17.3 EMINENT DOMAIN VALUATIONSEminent Domain = Government’s right to take private property, along with the payment of just compensationCondemnation = Government exercising their Power of Eminent Domain (police power)Just Compensation = The Fair Market Value of the Property Taken

Appraisals for Eminent Domain purposes are Complex, must Conform to Specific Law, and may involve Court Testimony

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EMINANT DOMAIN ISSUES & TERMS

•Condemnor – Agency Acquiring the Property•Condemnee – The Property Owner Affected•Personal Property – Typically No Compensation•Legal Setting – Testimony in front of Judge & Jury•Partial Taking – The part taken out of a larger parcel•Reminder Parcel – Part the Owner gets to keep• Larger Parcel – The property or “economic unit”

before the Condemnation (the Taking)19

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EXAMPLE OF A TAKING

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VALUES – DAMAGES & BENEFITSJust Compensation can involve four elements to consider:• The Value of the Larger Parcel (Before the Taking)• The Value of the Part Taken• Any Damage to the Remainder (After the Taking)• Referred to as Severance Damages

• Any Benefit to the Remainder (After the Taking)• Benefits are separated – General vs. Specific

Various Courts Differ as to how the foregoing Elements are Factored into the Valuation and Determination of Just Compensation 21

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CHAPTER SUMMARY

Appraisers are faced with a growing variety of appraisal assignments. Many of these assignments now involve unusual concepts in Ownership, Design, and Construction types. A common appraisal situation involves estimating the market value of the lessor’s and/or lessee’s interests in a given property.

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CHAPTER SUMMARY (Con’t.)

One of the most specialized areas of appraisal practice involves valuing property for eminent domain. Eminent domain often involves acquisition of only a portion of the property, called a Partial Taking. Here, the appraiser must consider the concepts of the Larger Parcel, the Remainder Parcel, Severance Damages, and General and Special Benefits, in order to reach a final value conclusion.

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IMPORTANT TERMS & CONCEPTSAirspace Condominium Mobile Home

Attached Housing Modular Homes

Condemnation Partial Interests

Conditions, Covenants & Restrictions (CC&R’s) Party Wall

Condominium Patio Home

Cooperative Prefabricated Components

Homeowner’s Association Prefabricated Homes

Just Compensation Row House

Leased Fee Time-Share Ownership

Leasehold Townhouse

Manufactured Home Zero-Lot-Line Home

Master Mortgage24

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