Leasehold and Ground Lease Appraisal in California

Short answer: A leasehold appraisal values the tenant’s interest in a property under a lease, usually a long ground lease where the tenant owns or built the buildings on someone else’s land. A leased fee appraisal values the landlord’s side: the rent for the rest of the term plus the property coming back at the end. A fee simple appraisal values the property as if no lease were in the way. In California, the remaining term, the rent compared to market, the reset and reversion clauses, and state rules on lease length, reassessment and public land all change the numbers. PM Appraisal appraises leasehold, leased fee and fee simple interests in every commercial property type across California, and you talk directly to the appraiser on your assignment. Call or text (805) 990-9700.

Plenty of California commercial real estate sits on land the building owner does not own. A shopping center pad leased to a restaurant for decades, a hotel on leased land near the water, a hangar or office at an airport, a center on Agua Caliente land in Palm Springs, a gas station on a family’s ground lease, an industrial building on railroad or port land. The person who owns the building, the person who owns the land and the lender on either one each hold a different interest, and each one has its own value. Our commercial property appraisal page explains how a commercial report is built. This guide covers what changes when there is a long lease in the picture.

General information, not legal or tax advice. Talk to your attorney or CPA about your lease.

What do leasehold, leased fee and fee simple appraisals each value?

Each one values a different bundle of rights in the same property, so the engagement letter has to say which one the client needs.

Fee simple. Full ownership, valued as if the property were free of any lease and could be rented at market. Lenders sometimes want this value alongside the others.
Leased fee. The landlord’s interest. The owner gets the contract rent for the rest of the term, then gets the land back, often with the buildings. A landlord collecting a rent set decades ago may hold an interest worth far less than fee simple today, or more, if the rent sits above market.
Leasehold. The tenant’s interest. The tenant has the right to use the property for the rest of the term at the contract rent, plus whatever the lease says about the buildings. A tenant paying well below market rent with many years left can hold a valuable interest. A tenant with few years left, or paying above market, may hold an interest worth little.
Sandwich interests and subleases. When a ground tenant subleases to someone else, there can be three or more layers, each with its own value. A sublease interest is valued the same way, one layer down.

The interests are linked but they do not simply add up to the fee simple value. Each is valued on its own terms, from its own evidence.

What drives the value of a ground lease interest?

The lease itself, read clause by clause. These are the items that move value the most:

Remaining term, including options. How many years are left, and who controls the renewal options. A long remaining term makes a leasehold behave like ownership. A short one makes it a wasting asset.
Contract rent versus market rent. The gap between what the lease charges and what the land or the property would rent for today is the heart of the analysis, for both sides.
Rent resets and escalations. Fixed bumps, CPI adjustments, percentage rent and periodic reappraisal clauses that reset the ground rent to a share of current land value. A reset to market a few years out changes the picture for everyone.
What happens to the buildings at the end. Many ground leases say the improvements revert to the landowner. Others require the tenant to remove them. That reversion is part of the landlord’s value and a cost to the tenant.
Permitted use and assignment. A lease that limits the property to one use, or bars assignment or subletting without consent, narrows the market for the interest.
Financing clauses. Whether the landlord subordinates the land to the tenant’s loan, and whether the lease gives the lender notice and cure rights, a new lease after a default and protection against termination. Lenders read these closely, so do buyers.
The buildings and their remaining life. Age, condition and remaining economic life of the improvements compared with the remaining term.
Where the land is. The same lease terms mean different things on a busy corner in Orange County and a highway pad in the Central Valley.

We read every amendment, estoppel and memorandum of lease, not just the summary. If the lease and the rent roll disagree, the appraisal says so.

Who orders a leasehold or ground lease appraisal in California?

Private and hard money lenders. A loan on a building that sits on leased land is a loan on the leasehold. The lender needs to know what the interest is worth today and how much term is left past the loan’s maturity. See private and hard money lending appraisals.
Buyers and sellers. Ground-leased restaurant pads, retail centers, hotels and office buildings trade as leaseholds, and the land under them trades as leased fee, often to a different kind of buyer.
Estates and trusts. When a decedent owned the land under a long lease, or a building on leased land, the date-of-death value is of that interest, not of fee simple. See estate and trust appraisals and date of death appraisals.
Divorce and partnership disputes. A spouse or partner may hold a leasehold, a leased fee or a share of either. See divorce appraisals, partner and LLC buyout appraisals and fractional interest appraisals.
Eminent domain. When a public agency takes property under a lease, the award for the property has to be sorted out between the landlord and the tenant, and the lease’s condemnation clause matters. Your attorney handles the law. We value the interests. See eminent domain appraisals.
Lease negotiations and rent resets. Landlords and tenants use an appraisal or real estate consulting to set a new ground rent, price an extension or decide whether to buy out the other side.

How do California lease length rules affect value?

The Civil Code caps how long certain leases can run, which shapes how much term an interest can ever have. Under Civil Code Section 718, a lease of a town or city lot that reserves rent cannot run longer than 99 years. Property owned by a city or other municipality is generally limited to 55 years, and tidelands granted to a city by the state to 66 years unless the grant sets its own term. Section 719 lets a city lease its property for up to 99 years when the lease is subject to periodic review and authorized by an ordinance after a public hearing. Under Section 717, a lease of land for agricultural or horticultural purposes that reserves rent cannot run longer than 51 years.

Land held in trust for a tribe follows federal law instead. In Palm Springs, leases on the Agua Caliente Indian Reservation may run up to 99 years under 25 U.S.C. Section 415, and the Bureau of Indian Affairs approves them. See commercial appraisal in Palm Springs and the Coachella Valley.

When does a lease trigger a property tax reassessment in California?

The 35-year line is the one to know. Under Revenue and Taxation Code Section 61(c), each of these is a change in ownership:

Creating a leasehold in taxable real property for a term of 35 years or more, including renewal options
Ending a leasehold whose original term was 35 years or more
Transferring a leasehold with 35 years or more left, including renewal options
Transferring the landlord’s interest in property subject to a lease with less than 35 years left

Only the part of the property under that lease is treated as changing hands. Section 62(g) adds the other side: selling the landlord’s interest subject to a lease with 35 years or more left, including options, is not a change in ownership.

Leases of public land work differently. A lease of land owned by a city, port, airport or other tax-exempt owner can create a taxable possessory interest, which Section 107 defines as independent, durable and exclusive possession of land or improvements not coupled with ownership. Under Section 61(b), creating, renewing, extending or assigning a taxable possessory interest in tax-exempt real property is a change in ownership for any term.

If the assessor’s new value after one of these events looks too high, a supported appraisal of the right interest, as of the right date, is the evidence for an appeal. See property tax appeal appraisals.

General information. Whether a specific lease, option or assignment triggers reassessment is a question for your attorney, your CPA or the county assessor.

What should you send the appraiser for a leasehold or ground lease assignment?

The full ground lease and every amendment, assignment, memorandum and estoppel certificate
Any subleases, with the rent roll and lease abstracts for the tenants in the building
The rent history and the next reset or escalation dates
Any lender protection agreement, subordination agreement or recorded notices
For public or tribal land: the agency or BIA lease approval and any possessory interest assessment notices
Operating statements for the improvements, and any prior appraisals
The purpose (loan, sale, estate, divorce, buyout, eminent domain, tax appeal), the interest to be valued and the effective date

Your appraiser will confirm the exact list on the first call.

Why do lenders, attorneys and CPAs call PM Appraisal for leasehold work?

You talk to your appraiser. No coordinator, no AMC portal. We pick up the phone, and we are your ears and eyes on the property.
We read the lease. Ground lease value lives in the clauses. Our narrative reports show which ones drove the number and why.
Every interest, every property type. Leasehold, leased fee and fee simple, in office, retail, industrial, multifamily, hotels and motels, gas stations, land, vineyards and agricultural, mixed-use and special-use property.
Every kind of commercial appraisal. Leasehold work is one example. We also prepare lending, estate and date-of-death, trust, divorce, retrospective, partition, litigation, eminent domain, tax appeal and consulting assignments.
Statewide. Our team is based in San Diego County and appraises property in every California county. Portfolios with leased land in several counties are welcome: see multi-property portfolio appraisals.
Rush commercial appraisals in 5 to 7 business days, when a loan or a deadline is close. See rush commercial appraisals.

Our opinions are independent. We never take an assignment that requires a predetermined value, and our value conclusion is never tied to the result anyone wants.

Standard timing depends on the property and scope. Call (805) 990-9700 for a timeline on your assignment. Lenders, investors, attorneys and CPAs: call (805) 990-9700 to scope a leasehold, leased fee or ground lease appraisal.

This article is general information, not legal or tax advice. Talk to your attorney or CPA about your lease and your situation.

Frequently Asked Questions

What is a leasehold appraisal?

A leasehold appraisal values the tenant's side of a lease: the right to use and occupy the property for the rest of the lease term, under the lease's rent and conditions. It comes up most often with ground leases, where a tenant built or bought the improvements on land it leases from someone else. The value depends on how many years are left, how the rent compares to market, what happens to the buildings when the lease ends and what the lease lets the tenant do.

What is the difference between leasehold, leased fee and fee simple?

Fee simple is full ownership with no lease in the way. Leased fee is the landlord's interest: the rent for the rest of the term plus getting the property back when the lease ends. Leasehold is the tenant's interest: the right to use the property for the rest of the term at the contract rent. The same building can have three different values depending on which interest is being appraised, so the engagement letter has to name the interest.

Who needs a ground lease appraisal in California?

Lenders making a loan secured by a tenant's leasehold, buyers and sellers of ground-leased centers, hotels and pads, landlords selling the land under a lease, trustees and executors when an estate owns either side of a lease, family law attorneys when a spouse owns a leasehold or a leased fee, and partners in a buyout. Owners and their attorneys also use one in eminent domain and property tax matters. PM Appraisal appraises every one of these interests anywhere in California.

Does a long ground lease trigger a property tax reassessment in California?

It can. Under Revenue and Taxation Code Section 61(c), creating a leasehold in taxable real property for a term of 35 years or more, including renewal options, is a change in ownership, and so is transferring a leasehold with 35 years or more left. Under Section 62(g), selling the landlord's interest subject to a lease with 35 years or more remaining is not a change in ownership. Ask your attorney or CPA how the rules apply to your lease.

How long can a lease of California land be?

Civil Code Section 718 says a lease of a town or city lot that reserves rent cannot run longer than 99 years, and Section 717 sets 51 years for agricultural or horticultural leases. Property owned by a city or other municipality is generally limited to 55 years, and city tidelands to 66 years unless the state grant says otherwise, with a longer term allowed for city property under the conditions in Section 719. Leases of tribal trust land follow federal rules.

Can you appraise a lender's leasehold collateral on a rush?

Yes. Rush commercial appraisals take 5 to 7 business days. Send the full ground lease and every amendment with the request, because the remaining term, the rent resets and the lender protection clauses drive the value and the loan decision. Call or text (805) 990-9700.

Do you only appraise leasehold interests?

No. Leasehold work is one example. We appraise every commercial property type, including office, retail, industrial, multifamily, hotels and motels, gas stations, land, vineyards and agricultural, mixed-use and new construction, and every kind of commercial appraisal: lending, estate and date of death, trust, divorce, retrospective, partition, partnership buyouts, litigation, eminent domain, tax appeals and consulting, in every California county. Call or text (805) 990-9700.

Property on leased land, or a long lease to value?

Lenders, investors, attorneys and CPAs: call or text (805) 990-9700 with the lease and the interest you need valued. You talk to the appraiser who will inspect the property and write the report. Rush commercial appraisals in 5 to 7 business days.

(805) 990-9700

Call now Text

Keep reading

This article is general information, not legal or tax advice. Talk to your attorney or CPA about your situation.

Leasehold and Ground Lease Appraisals in California: Valuing the Tenant's Interest, the Landlord's Interest and the Land