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Leasehold apartment properties - how to value them?


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#1 VicHockeyFan

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Posted 25 January 2014 - 01:09 PM

I hope that makes sense, the title.  A few condos, including at least one very large one (647 Michigan St.) here in Victoria are on leases, and I wonder what implications that has for a buyer.  Now, if I recall correctly, they are not eligible for CMHC, so you need 25% down.

 

But what else do we need to know?  As these leases get shorter, are the values dropping?

 

 


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#2 phx

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Posted 25 January 2014 - 01:54 PM

The values should drop, but it doesn't take that many buyers over-paying to keep values up.

 

It might be appropriate for 647 Michigan to sell for 20% less than freehold.  The market may decide it's worth more than that, though.



#3 D.L.

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Posted 25 January 2014 - 05:29 PM

I doubt there will be a noticeable reduction in market value until there's less than 20 years left on the property lease. Most leaseholds in town probably still have over 50 years left



#4 Mike K.

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Posted 25 January 2014 - 05:46 PM

Remind us again what the story with 647 Michigan is?


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#5 VicHockeyFan

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Posted 25 January 2014 - 06:08 PM

Built in 1969 and lease expires in 2073.
<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#6 Mike K.

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Posted 26 January 2014 - 11:09 AM

But what's up with the lease, I mean.

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#7 VicHockeyFan

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Posted 26 January 2014 - 11:22 AM

But what's up with the lease, I mean.

 

You don't own the place, you are buying a pre-paid lease.  I know we touched upon this subject elsewhere, but maybe Marko can chime in.  Are there any buildings in Greater Victoria that have a relatively short term left on their lease?


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#8 Mike K.

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Posted 26 January 2014 - 11:24 AM

And what would convince a developer to do something like that?

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#9 VicHockeyFan

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Posted 26 January 2014 - 11:27 AM

And what would convince a developer to do something like that?

 

It's done now on native land, of course.  I'm not sure why it was done in the 60's and 70's, I'll guess it had/has something to do with tax implications.  ie. if you had owned the land for some time, and then stuck a 80-unit strata-title on it and sold the building and the land, you'd have a tax implication.  But if you kept the land and leased out portions (suites) of the building, maybe no capital gains etc.  Or maybe it was a way to finance building the thing.  Build a monthly-rental apartment, and how do you raise the money?  Pre-sell long-term leases and maybe you could secure construction financing. 

 

970 Heywood is another pretty big leasehold.


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#10 MarkoJ

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Posted 26 January 2014 - 12:03 PM

This is my understanding of leaseholds....

 

With leasehold properties the buyer doesn't actually own the land, but instead owns the right to use it for a given time period.

 

When a buyer purchases a leasehold property, he or she own the actual home and/or buildings on the land, but rents or leases the land itself. There are many different types of of leasehold properties with varying lease terms. Most leasehold real estate throughout British Columbia, are based on a 99 year Head Lease divided into sub-leases for each individual property. 

 

I would say leasehold properties typically sell for 20-30% less than comparable freehold.  I think the biggest reason behind this is less financing options being available.


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#11 MarkoJ

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Posted 26 January 2014 - 12:09 PM

But what else do we need to know?  As these leases get shorter, are the values dropping?

 

I think values will drop as the head leaseholds get low on years.  It will be tough to get financing on a 20 year old head lease as banks probably will not want to loan 30 year money on a 20 year old head lease.  

 

I guess the biggest thing you need to know is what happens when a lease expires?  It will be interesting to see once 99 year leases start expiring across the province in a few decades.


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#12 VicHockeyFan

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Posted 26 January 2014 - 01:12 PM

I think values will drop as the head leaseholds get low on years.  It will be tough to get financing on a 20 year old head lease as banks probably will not want to loan 30 year money on a 20 year old head lease.  

 

I guess the biggest thing you need to know is what happens when a lease expires?  It will be interesting to see once 99 year leases start expiring across the province in a few decades.

 

So is it reasonable to say that by buying this type of property, your chance for increased value over time is somewhat in doubt?  I mean, that could account for the lower costs now.


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#13 Redd42

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Posted 26 January 2014 - 01:31 PM


 

I would say leasehold properties typically sell for 20-30% less than comparable freehold.  I think the biggest reason behind this is less financing options being available.

 

And I would say another big reason that leaseholds generally sell for less is that your monthly fee is typically much higher than your typical strata fee payment. So more of your monthly money going towards something that is not adding to your equity. The typical strata payment on comparable older condos is $200 - $250 per month. Not uncommon for leasehold monthly fees to be more than $350. And that definitely holds for some very inexpensive (compared to simiar aged townhouses) to buy leasehold townhouses that are on native land.



#14 D.L.

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Posted 26 January 2014 - 01:40 PM

What accounts for the higher monthly fee?

#15 VicHockeyFan

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Posted 26 January 2014 - 01:40 PM

And I would say another big reason that leaseholds generally sell for less is that your monthly fee is typically much higher than your typical strata fee payment. So more of your monthly money going towards something that is not adding to your equity. The typical strata payment on comparable older condos is $200 - $250 per month. Not uncommon for leasehold monthly fees to be more than $350. And that definitely holds for some very inexpensive (compared to simiar aged townhouses) to buy leasehold townhouses that are on native land.

 

Why would that be, if the fees in both cases are just going to common maintenance?  Could it just be that the property tax is built into leasehold fees, and not in conventional strata?


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#16 phx

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Posted 26 January 2014 - 01:42 PM

The higher monthly fees are more to do with it being native land, and not because it's a leasehold.



#17 Redd42

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Posted 26 January 2014 - 01:47 PM

The higher monthly fees are more to do with it being native land, and not because it's a leasehold.

 

No, leashold fees are higher on all comparable leasehold properties vs. strata (say comparing 1970s or 80s apt style units). The townhouses I referred to are particularly high though for the reason you stated.



#18 phx

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Posted 26 January 2014 - 01:57 PM

Why is that?



#19 VicHockeyFan

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Posted 26 January 2014 - 02:04 PM

No, leashold fees are higher on all comparable leasehold properties vs. strata (say comparing 1970s or 80s apt style units). The townhouses I referred to are particularly high though for the reason you stated.

 

Why though?  Where is the additional money going, if theoretically buildings of the same type and age have similar maintenance costs?


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#20 VicHockeyFan

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Posted 26 January 2014 - 02:04 PM

The higher monthly fees are more to do with it being native land, and not because it's a leasehold.

 

Why, do the natives bill additional monthly fees, over and above the pre-paid lease?


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

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