Mass Appraisal of Leasehold
Interest in Exempt Real Property
Kirk F. Boone, PPS
North Carolina
Advanced Personal Property Seminar
September 13, 2010
What we’ll cover regarding the
mass appraisal of LIERP
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What is it?
Why does it matter?
Can it be done?
If so how?
What is Leasehold Interest?
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Careful –not to be confused with Leasehold
Improvement.
Leasehold improvements. Items associated
with a lessee (the tenant), that have been
affixed to the real property owned by a lessor.
What is Leasehold Interest?
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2)
3)
The three most common forms of ownership
interest in real property are:
Fee Simple
Leased Fee
Leasehold
Fee Simple Interest
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Explicitly assumed, the most complete
bundle of rights available
Unencumbered by any other interest.
Perpetuity
Leased Fee Interest
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The Fee Simple interest, but encumbered by
a lease. (Rights of use and occupancy
conveyed to lessee)
If lease rates are market rates, Lease Fee
Value and Fee Simple Value are equal.
If lease rates exceed market rates?
If market rates exceed lease rates?
Leasehold Interest
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The interest held by a tenant
If lease rates = market rates, leasehold has
no value.
If lease rates < market rates, leasehold
interest has value.
Value is dependent on the specific terms of
the lease.
Fee Simple = Leased Fee + Leasehold
Fee Simple = Leased Fee + Leasehold
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Market rent(2k) = Contract rent(2k)+Leasehold
Fee Simple(FS) = Leased Fee(LF)+Leasehold(0)
Market Rent(2k)=Contract rent(1k)+Leasehold(1k)
Fee Simple $2,000
Leased Fee $1,000
Leasehold $1,000
Leasehold Interest Example #1
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Subject property is leased for $10,000/ mo.
All comparable properties lease for $30k/ mo.
Other terms of lease of the subject property
are common, same as comparables.
Does Leasehold Interest have value?
Leasehold Interest Example #2
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Subject property is leased for $1/ yr.
All comparable properties lease for $20k/ mo.
Other terms of lease of subject property are
common, same as comparables/
Does Leasehold Interest have value?
How is it measured?
Leasehold Interest Example #3
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Subject property is airport garage, leased for
$1/ yr. 3 yr renewable lease. 20 yr history.
All comparable properties lease for $2,000/ mo.
Terms of subject lease require lessee to
perform all maintenance, resurface and mark
the tarmac every 4 years, supply gasoline and
maintenance for aircraft owned by landlord.
Does Leasehold Interest have value?
How is it measured?
Leasehold Interest Appraisal
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You must examine the terms of the lease to
determine if leasehold interest has value.
All leases are not the same.
The value is for a benefit – a cash savings.
The benefit is intangible property.
Leasehold Interest
Why does it matter?
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If the real property being leased is exempt
real property – the intangible property is
taxable! NCGS 105-275(31)
In North Carolina, Leasehold interest in
exempt real property is taxable as intangible
personal property! NCGS 105-273(8)
Appraising Leasehold Interest,
can it be done?
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Yes!
Here’s the formula.
Appraising Leasehold Interest,
can it be done?
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How to appraise the benefit of a cash flow?
Present value of future cash flows?
How about direct capitalization method?
How about discounted cash flow analysis?
Direct Capitalization
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NOI $20,000/mo benefit for 8 years using
a10% cap rate?
V=I/R
NOI $240,000 /yr divided by 10% ?
$2.4 million value?
$240,000 x 8 years = $1,920,000
Wrong.
Discounted Cash Flow Analysis
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Why is discount rate lower than capitalization
rate?
Monthly benefit is $20,000
Term is 8 years
Present value of an annuity due, discounted
at 6% is…..
$1,538,356
Calculator, excel, websites
Mass appraisal challenges
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You cannot look at only the lease amounts, but
also the terms of subject and comps.
What net benefit are you appraising and can it
be translated to a cash flow?
Even if rent is zero cash, the terms and
conditions may negate any benefit.
Did the city/county gratuitously lease the space
without realizing property tax liability?
Determining discount rate and length of lease.
Steps to overcome challenges
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Review exempt real property parcels
Determine which ones are leased
Require and review copies of the lease
Start with the clear ones (Example 2 vs. 3)
Discuss with assessor the result.
Determine uniform standards for rate and
length.
Discount Rate
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Average of 10 year Treasury yields is about
4.5%. Let’s say 5%
Add for risk. Building could burn, landlord
could not allow renewal.
Be very reasonable. (6 to 7%)
Consider how risk relates to monthly
benefit/rent payment or lack thereof.
If the TP argues the rate is too high….
If TP says you should add more for risk…..
Length of lease
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Is a 3-year renewable lease really a 3 year
lease?
Many short renewable leases are in reality,
renewed many times.
Long leases have much risk in later years,
with less present value for later years.
Suggest using 8 years, reviewing every
January. Why?
Keep in mind three principles
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NCGS 105-274 – It is taxable
NCGS 105-283 and 105-284 – Uniform
appraisal and assessment
Don’t sweat the petty things and don’t pet the
sweaty things.
In Conclusion
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What is it? – A taxable intangible benefit
Why does it matter? – You’re required to
assess and appraise it
Can it be done? – Yes, but it’s different.
If so how? – Discounted Cash Flow, Present
Value of an annuity due.
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Equitably
Uniformly
Contact Information
Kirk F. Boone, PPS
North Carolina Sales and Marketing
Tax Management Associates, Inc. (TMA)
2225 Coronation Blvd.
Charlotte, NC 28227
1-800-951-5350
919-397-7846 (mobile)
www.tma1.com