7.15.4 Valuation of the Leasehold Estate

A. The value of the Leasehold Estate is determined by analyzing the factors used by the MAP Appraiser in developing a value for Criterion 3 such as income capitalization supported by comparable sales and included on line 3.a of form HUD-92264-A.

1. For affordable projects that involve a ground lease on land or on both land and improvements without an option to buy, the Department will not insure a loan that will recognize a leasehold interest for security unless the property meets these requirements:

   • The lessor must be governmental body or a housing authority, or a non-profit entity. There are no exceptions and no waivers at the Regional level.

• The property must qualify as affordable housing, as defined in Chapter 3, Section 3.1.12;

• No deviations from form HUD-92070M are permitted, except for those previously stated.

  • The project must be a low leverage, low risk loan with significant public purpose benefit.

2. Valuation methodology and analysis must clearly outline the various components of the lease, and the Highest and Best Use section of the Appraisal must present the appropriate analysis and methodology that reflects the following:

   • Value of the Fee Simple Interest in the Land per requirements in the MAP Guide, typically supported by comparable sales and reflected elsewhere in the appraisal. The specific components of the fee simple estate must be clearly defined (i.e., land, land and shell, land and building, etc.)

• Value of the Leased Fee must reflect the Net Present Value of all lease payments and the appropriate risk to collecting those payments. The value must reflect the typical terms in the market by a typical investor and may be appropriately reflected by both a capitalization of the initial income for the current year lease and by using a Discounted Cash Flow. Any/all variances in value between these two methodologies must be analyzed and explained in terms of the risk to HUD.

• The impact of the Leased Fee Value on the Leasehold Estate must be clearly discussed and reflected in the Leasehold Value estimated in the Income Approach, and any/all adjustments must be reflected in the value determined by the Sales Comparison Approach.

• The resulting value of the Leasehold Estate must be analyzed and reported in Section G, Line 73b of form HUD-92264 and Line 3a of form HUD-2264-A respectively.

• Upfront land lease payments essentially reflect the Net Present Value of annual payments that would have otherwise occurred under a Land Lease, subject to any/all HUD requirements. The appraiser must analyze that payment as it reflects the Net Present Value of the income stream that would have otherwise been an operating expense, thereby reducing the NOI. This up-front payment may also affect Leasehold Value as set forth in Criterion 3, potentially impacting the requested loan amount.

• The appraiser must support all Overall Rates, Discount Rates, Internal Rates of Return, etc. as it relates to the various components of Leased Fee and Leasehold Estate Values in the Market and clearly explain the impact on the Value Estimates. The Leased Fee value may not exceed the Fee Simple Interest in the property (i.e., land, land and shell, land and building, etc.)

MAP Guide, March 2021 Go to beginning of Chapter 7

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Chapter 7 Valuation & Market Analysis 7.15 Leaseholds/Ground Leases

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