![]() Sometimes, the length of the ground lease is tied to the expected economic life of the proposed leasehold improvements.Ī leasehold interest in unimproved land is less valuable than the corresponding freehold interest in the same land. Moreover, the term of the ground lease must be of sufficient length to allow the lessee (developer) to obtain third-party leasehold mortgage financing on terms and conditions that make the proposed development financially feasible and to accommodate sub-tenant occupancy leases. The lease term must be of a sufficient length so the prospective lessee (developer) can amortize or recapture his or her investment. 3Īside from the financial benefits available to the landowner for entering into a long-term lease, there must be sufficient financial incentive (reward) for a prospective lessee (developer) to commit time, effort, and capital into undertaking site and building improvements, and marketing the finished product, if the developer is not an end user. Improvements made by the ground lessee typically revert to the ground lessor at the end of the lease term. a lease that grants the right to use and occupy land.usually a long-term lease of land with the lessee permitted to improve or build on the land and to enjoy those benefits for the term of the lease 2 or.a lease of vacant land, or land exclusive of any buildings on it, or unimproved real property-usually a net lease.Both the lessor and the lessee enjoy rights and privileges and are subject to obligations and restrictions, as agreed upon and spelled out in the executed ground lease, and which the courts strictly interpret.Ī ground lease is variously defined as follows: The lessor’s interest is known as the ‘leased fee’ interest, while the tenant’s interest is referred to as the ‘leasehold’ interest. The landowner retains the reversionary interest in the land realizable upon expiration of the ground lease. Conflicting interpretations of lease provisions at the time of rent review often lead to divergent and irreconcilable opinions of value, and resolution of a ground lease valuation dispute may require the court’s intervention and guidance.Ī ground lease is an enforceable contract that creates a lessor’s interest and a lessee’s interest in a legally defined parcel of land, where virtually all of the incidents of ownership are transferred from the landowner to the lessee for the entire term of the ground lease. Appraisal assignments involving potential arbitration and litigation often require the guidance of legal counsel. A basic understanding of contract law and an ability to interpret various legal documents, including leases, are important. In specialized areas, such as ground lease valuation, an awareness of relevant case law is paramount in developing and applying appropriate valuation methods. Problem identification always starts with a thorough reading of the lease, paying particular attention to relevant provisions, definitions, and descriptions of terms essential to the valuation process.Īll opinions of value involve some aspect of real estate law. While there are recognized and well-established valuation methods and techniques, the application of a particular valuation procedure to resolve a ground lease problem is always a function of the language contained in the ground lease-in particular, the rent reset clause-and any constraints imposed by the quality and quantity of available market data. ©2011 by the Appraisal Institute, Chicago, Illinois. Reprinted with permission from The Appraisal Journal (2011, Fall)
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