Unit 16: Appraising Partial Interests
- What is Fannie Mae Form 1073, and when is it used in condominium appraisals?
- How do planned unit developments (PUDs) differ from traditional subdivisions in terms of ownership rights?
- What is the difference between a leased fee interest and a leasehold estate?
- What are the four main types of lease interests, and how do they impact valuation?
- What are the differences between a gross lease, net lease, triple-net lease, and percentage lease?
- Below are key lease provisions that affect valuation. Choose one and explain its impact on property value:
- Escalator clause
- Renewal options
- Tenant improvements
- Tax-stop clause
- Expense-stop clause
- Purchase option
- Case Study – Leasehold vs. Leased Fee Interest Calculation
- A property has a scheduled rent of $80,000 per year, but the market rent is $100,000 per year.
- The remaining lease term is 10 years, and the discount rate is 6% per year.
- Calculate the excess rent for the leasehold interest.
- Determine the present value of the leasehold interest by discounting the excess rent over the lease term.
Student Calculation Grid for Partial Interests and Lease Valuation
| Step | Formula / Calculation | Student Answer | Hint |
|---|---|---|---|
| Scheduled Rent | Given: $80,000 | __________ | This value is provided |
| Market Rent | Given: $100,000 | __________ | This value is provided |
| Excess Rent | Market Rent - Scheduled Rent | __________ | Subtract scheduled rent from market rent |
| Lease Term | Given: 10 years | __________ | This value is provided |
| Discount Rate | Given: 6% per year | __________ | This value is provided |
| Present Value of Leasehold Interest | Discount excess rent over lease term | __________ | Use a present value discounting method |
Quick Reference Guide
✅ Key Definitions:
- Fannie Mae Form 1073: Used for appraising individual condominium units to assess value for mortgage lending.
- Leased Fee Interest: The landlord's ownership interest in a leased property, including the right to receive rental income.
- Leasehold Estate: The tenant's right to use the property for a specified period under a lease agreement.
- Gross Lease: Landlord pays most property expenses, while the tenant pays only rent.
- Net Lease: Tenant pays rent plus some or all property expenses (taxes, insurance, maintenance).
- Triple-Net Lease (NNN Lease): Tenant is responsible for all operating expenses.
- Percentage Lease: Rent is based on a percentage of the tenant’s sales revenue.
- Excess Rent: The difference between market rent and scheduled rent under an existing lease.
- Present Value of Leasehold Interest: The total value of excess rent over time, discounted to today’s value.
✅ Helpful Tips:
- Leased fee interest is valuable to landlords because it provides stable income.
- Leasehold interest is valuable to tenants when market rent is higher than their contract rent.
- Escalator clauses can increase rent over time, affecting lease valuation.
Concept Overview:
Appraising partial interests involves valuing ownership rights that are less than full fee simple ownership. These include condominiums, time-share projects, manufactured homes, tenant-in-common (TIC) agreements, lease interests, and other forms of shared or limited ownership. The appraiser must consider lease provisions, ownership rights, and financial structures when valuing these properties.
Rubric for Assignment 16
| Criteria | Points | Description |
|---|---|---|
| Content Understanding | 15 | Demonstrates strong understanding of the concepts. |
| Clarity and Completeness | 10 | Responses are logically structured, detailed, and include clear examples or visuals to support answers. |
| Grammar and Presentation | 5 | Answers are grammatically correct, formatted neatly, and supplemented with visuals (if applicable). |
| Total | 30 |