Valuation to the End of Life of a Leased Condo

While cruising MLS the other day, I came across V891550, a 35-year-old leasehold 3-bed condo in False Creek, asking price: $519K for 1248 sq.ft.

At first, I thought it sounded quite reasonable– $416/sq.ft. So my first thought was that it must be a leaker. It is, but the seller is paying the assessment. So far so good. But there must be a catch, right? Right. The (prepaid) lease expires in 2036, so the condo’s value drops to $0 then– all you have in 2036 is a share in a building which no longer has any right to the land. And a building that can’t be moved, with no land underneath it, is worthless.

Which makes this condo an interesting study– if somebody takes out a mortgage to buy it, they can’t amortize longer than 25 years. They can’t rely on appreciation in the long run, because it’s a foregone conclusion that the condo value disappears in 2036. Or you can keep the building then, but you have to lease the land all over again.

Let’s run some numbers…
Assume 100% LTV. A $519K mortgage. Assume interest rates will average 4% over the life of the mortgage. (I think this is low, but who knows what’ll actually happen).
$2,739 … Mortgage payment
..$318 … Maintenance Fee
..$176 … Property Taxes
…$ 75 … Paint & Appliances & Repairs fund.
—————
$3,308/month.

That’s the cost of “ownership” over the next 25 years. With the value dropping to zero at the end, and no potential for land appreciation upside. And I’m assuming there won’t be any special assessments in the future, which isn’t a guarantee in this part of the country.

Looking at the listing, it was built in 1976, and the interior doesn’t look like it’s seen a whole lot in terms of modernization– carpets, paint, countertops, but that looks about it. And the countertops are looking dated again. There are no photos of the bathrooms, so who knows what’s in there. At any rate, if I were to buy a place like this, I’d probably look to renovate it with newer finishings.

Is it just me, or does this seem crazy? $3,300 per month for a 3-bed 1976 condo for the next 25 years? And you get to live through a leaky condo repair, and it needs renovations on top of that price? And there’s no potential upside in land values? And interest rates could rise? Jeebus.

The realtor’s property details can be found here: http://joanmontgomery.com/mylistings.html/details-19315068

Here’s a relatively-similar renovated rental for $2460: http://www.rentpicnic.com/property/?pid=237

Or get yourself into the Athlete’s Village co-op building for $2100/month. http://vancouver.en.craigslist.ca/van/apa/2431069880.html

Just my opinions in here. What are yours?

Sort by:   newest | oldest | most voted
Anonymous
Guest
Anonymous

http://www.bloomberg.com/news/2011-06-13/rbc-begi

Home equity loans…. Rbc trying to compensate for drop off in demand

Li Kai Shing
Guest
Li Kai Shing

If built in 1976, and leasehold,its had 60 year lease.

If not mistaken srata act came into effect in mid 1960's

In 1976, didn't sound bad.

However, past the 1/2 way point…and I think this is good to analyze as others start to weave their way chronologically.

Probably see the purchases drop….unless the prices adjust for the approaching 2036.

Otherwise, they end up as rental units.

Once it hits 60…probable teardown

Someguy
Guest
Someguy

The leases will be extended for units that are still in livable condition. The risk associated with leasehold is 'how much is the new lease going to be?' much as the risk associated with freehold land is 'how much are my property taxes going to be?'

Leasehold where the owner of the land is a democratic government has no greater risk than freehold as the government sets lease rates or property taxes and the government is exposed to voter displeasure and the Canadian justice system.

Leasehold where the owner of the land and justice system are black-box and chieftain ruled is considerably riskier.

patriotz
Member

@Someguy:

There isn't a risk associated with a prepaid leasehold. There is a certainty that you will have to give the property back at the end of the lease.

The city is going to charge as much as it can get for the next leasehold, which will render the property worthless to the incumbent lessee.

That results in a discount of the fundamental value of the property compared to a freehold. But don't confuse that with a discount due to risk.

macho nacho
Guest
macho nacho

I heard a rumour (but not confirmed) that the leasehold contracts with the COV contain certain clauses for the renewal, where if the new lease exceeded a certain increase, the COV would be obligated to buy back the units/buildings. It's actually hard to tell what leasehold units are worth in 2036 as the initial lease may/may not contain a cap on future lease increases.

superduperbulltime
Guest
superduperbulltime

Well bear just came back from long trip to Hong Kong and Shanghai. Had good dimsum lots of rich asian talk still talk about Vancouver condo money machine so bad news for you. Rent keep rising for you bear and interest rate low. Your wage so low now even soup seem expensive. Sad life for bear should have paid more attention in school.

space889
Guest
space889

@superduperbulltime: Yes, yes, you are right. However if we can't even afford soup then how can we afford your rent? If it is too expensive for the average folks then will Vancouver degenerate into a hobo city? Then who will you rent to? Oh I know you are so rich you don't need to rent, you just buy and hold, except who will you sell it to realize the capital gain?

paradox
Guest
paradox

What a beautiful day to remind us what is like living in the best place on earth!

July is almost here and still sub 12 degree C temperatures.

Welcome to the best place on earth!

Nvwl
Guest
Nvwl

@superduperbulltime: Shame you have to pay so much to private security force to keep roving bands of hobos out of your empty investment condo, otherwise they steal subzero fridge and windows and sell for scrap.

Hard to sell investment condo when filled with pigeons and have no fridge.

MBA
Guest
MBA

As a relative real estate layman, I would not understand the whole implications of the leasehold thing from this listing. Someone quick in a buying frenzy without decent advice might sail right into this place without understanding any of this.

Laibach
Guest
Laibach

Cottages are the next BIG thing…

http://www.vancouversun.com/business/Recreational

patriotz
Member
@Laibach: Elton Ash, regional executive vice-president of Re/Max of Western Canada, said prices are down as much as 20 per cent from peak levels in 2006-2007. “The strengthening oil sector has also brought Albertans back into the mix, driving demand for both local and coastal B.C. properties.” Examples of how prices have dropped are Salt Spring Island, where starting prices for a three-bedroom winterized waterfront lot dropped from $1.5 million in 2008 to $669,000 in 2011; and the North Okanagan, where starting prices on the same type of property dropped over the same period from $1.5 million to $995,000. And what did Mr. Ash have to say in 2007? Baby boomers living large in recreational property markets across Canada; Upper-end set to soar in 2007 Kelowna, BC (May 1, 2007) — Luxury recreational property sales are set to soar in… Read more »
Devore
Member
Devore

@MBA: Well, the lease is pre-paid for decades, so that's a plus, and you just have to renew when time comes, how much could it possibly be? No?

I never looked at leaseholds, but I wonder how much realtors know about them.

@superduperbulltime: Rent just went down 5%, although it was "scheduled" to go up 2.3% this year. Did someone make a mistake? Mental lapse? Fat fingers? Suggestive hypnosis? No, I just asked for it.

Devore
Member
Devore

@patriotz: Good find. These pricks DO literally just draw a straight line, don't they?

Phil
Guest
Phil
Anonymous
Guest
Anonymous

@Laibach: ….Cottages are the next BIG thing…
http://www.vancouversun.com/bu…..story.html….

That's a new low, even for the Sun. Whistler has been dropping steadily for 10 years, and with the prospect of successive ski hill bankruptcies, values will continue to tank. What a pile of nonsense. Smacks of desperation!

jesse
Member
Leaseholds are pretty much par for the course in many countries, where freehold is either uncommon or simply impossible. The question is what will the leasee do with the land after the lease expires? They can either renew it with the existing structure intact, or demo and rebuild to highest and best use, which is likely. So this land is a 25 year annuity so let's for argument's sake say the place rents for $3000/month, at a discount rate of 7% and annual rent appreciation of 2%, gives NPV of $410K. If this is extended indefinitely the NPV would be $576K. The other thing is that as the annuity term decreases, the NPV will decrease, unlike a freehold that can be recapitalized. So in 2021, assuming 2% rental equivalence appreciation, the NPV will be 367K in 2021 dollars. In 2031… Read more »
patriotz
Member

@jesse:

The price/rent for this unit is about 200, but the price/rent for a similar freehold would be about 300, wouldn't it?

So the market does appear to be pricing in the discount from a freehold, the problem is it's not valuing the freehold right in the first place.

🙂

jesse
Member

@patriotz: "So the market does appear to be pricing in the discount from a freehold"

Yes that's a good observation; M-'s is a great post because it highlights how irrational this market has become. Studying a leasehold accentuates the "greater fool" fallacy.

Patiently Waiting
Member
Patiently Waiting

Journalist Rob Carrick and economist David Madani discuss the growing disconnect between incomes and housing prices. They expect rising rates will reverse this.

http://www.theglobeandmail.com/globe-investor/inv

Li Kai Shing
Guest
Li Kai Shing

Those Hospice hatin' HAMsters at UBC must be on leasehold, I can't envision any UBC endowment lands being sold off (freehold) …probably violate their charter..

paradox
Guest
paradox
wpDiscuz