311: Properties Subject to Leasehold Interests

When a mortgage is secured by a leasehold estate (or is subject to the payment of "ground rent"), the borrower has the right to use and occupy the real property under the provisions of a lease agreement (or ground lease) for a stipulated period of time, as long as the conditions of the lease are met.  (When the lease holder is a community land trust, there may be significant restrictions on both the purchase and resale of the property; therefore, we provide more detailed guidance on appraising this type of leasehold estate in Section 312 below.) The valuation of a property that is subject to a leasehold interest may require a complex analysis, so an appraiser should develop (and attach as an addendum to the appraisal report form) a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions of the lease agreement or ground lease and discusses what effect, if any, they have on the value and marketability of the subject property.

In developing the sales comparison approach to value, the appraiser generally should use as comparable sales properties that have similar leasehold interests.  When there are a sufficient number of closed comparable sales of properties with similar leasehold interests available, the appraiser should use them in its analysis of the market value of the leasehold estate for the subject property and report them in the "sales comparison analysis" grid on the applicable appraisal report form.  However, if not enough comparable sales with the same lease terms and restrictions are available, the appraiser may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates -- as long as he or she explains why the use of these sales is appropriate.  In such cases, the appraiser must make an appropriate adjustment on the "sales comparison analysis" grid to reflect the market reaction to the different lease terms or property rights appraised.