Appraising Special Ownerships and Interests Basic Real Estate Appraisal: Principles & Procedures – 9 th 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 Page 562 © 2015 OnCourse Learning

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 Page 563 © 2015 OnCourse Learning

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 applicable 4 Page 566 © 2015 OnCourse Learning

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 5 Page 567 © 2015 OnCourse Learning

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) 6 Page 568 © 2015 OnCourse Learning

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 7 Page 569 © 2015 OnCourse Learning

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 8 Page 570 © 2015 OnCourse Learning

VARYING CONSTRUCTION TYPES Manufactured 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 Page 571 © 2015 OnCourse Learning

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 10 Page 573 © 2015 OnCourse Learning

17.2 PARTIAL INTERESTS Interests 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 follow 11 Page 575 © 2015 OnCourse Learning

LEASED PROPERTY INTERESTS Leased Fee The Owner’s Interest in the Property Leasehold 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! 12 Page 576 © 2015 OnCourse Learning

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 13 Page 577 © 2015 OnCourse Learning

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. 14 Page 578 © 2015 OnCourse Learning

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 Page 578 © 2015 OnCourse Learning

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 16 Page 579 © 2015 OnCourse Learning

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 interests Time-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 Page 580 © 2015 OnCourse Learning

17.3 EMINENT DOMAIN VALUATIONS Eminent Domain = Government’s right to take private property, along with the payment of just compensation Condemnation = 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 18 Page 581 © 2015 OnCourse Learning

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 Page 581 © 2015 OnCourse Learning

EXAMPLE OF A TAKING 20 Page 582 © 2015 OnCourse Learning

VALUES – DAMAGES & BENEFITS Just 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 Page 582 © 2015 OnCourse Learning

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. 22 Page 584 © 2015 OnCourse Learning

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. 23 Page 584 © 2015 OnCourse Learning

IMPORTANT TERMS & CONCEPTS Airspace CondominiumMobile Home Attached HousingModular Homes CondemnationPartial Interests Conditions, Covenants & Restrictions (CC&R’s)Party Wall CondominiumPatio Home CooperativePrefabricated Components Homeowner’s AssociationPrefabricated Homes Just CompensationRow House Leased FeeTime-Share Ownership LeaseholdTownhouse Manufactured HomeZero-Lot-Line Home Master Mortgage 24 Page 585 © 2015 OnCourse Learning