HomeMy WebLinkAbout10 - Beacon Bay Ground Lease Finance Subcommittee ReportPORT CITY OF
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City Council Staff Report
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October 8, 2019
Agenda Item No. 10
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Dan Matusiewicz, Finance Director - 949-644-3123,
dmatusiewicz@newportbeachca.gov
PREPARED BY: Steve Montano, Deputy Finance Director,
smontano@newportbeachca.gov
PHONE: 949-644-6240
TITLE: Beacon Bay Ground Lease Finance Subcommittee Report
ABSTRACT:
Per City Council direction, a Finance Subcommittee has prepared findings concerning the
lease rental rate charged to lot lessees in the City -owned property known as Beacon Bay.
RECOMMENDATION:
a) Determine this action is exempt from the California Environmental Quality Act (CEQA)
pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because
this action will not result in a physical change to the environment, directly or indirectly;
and
b) Receive and file the report.
FUNDING REQUIREMENTS:
The details and analysis of the lease rental rate are discussed in the Finance
Subcommittee Report. The City receives $2.8 million annually in Beacon Bay lease
revenue.
DISCUSSION:
On February 12, 2019, the Beacon Bay Homeowners' Association (HOA) requested to
the City Council that the lease rental rate charged to lot lessees in Beacon Bay be reduced
from 2.5% of the sales price of a leasehold estate including improvements to 1 % of such
sales price or an appraised value. The City retained the firm Keyser Marston Associates
(KMA) to review the assumptions and calculations submitted by the HOA. KMA's analysis
lead to different conclusions than the HOA's analysis. The City Council referred the
request of the HOA to the Finance Committee with direction that the Finance Committee
form a subcommittee of its public members (Subcommittee) who would report their
findings directly to the City Council.
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Beacon Bay Ground Lease Finance Subcommittee Report
October 8, 2019
Page 2
The City Council requested that the Subcommittee attempt to reconcile the differences
between the calculations made by KMA and those of the HOA. Further, the City Council
also requested that the Subcommittee opine on the appropriateness of having an
appraisal prepared to provide up-to-date information as to the fair market rental value of
the Beacon Bay lots.
The Subcommittee's conclusions are addressed in Attachment A.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
ATTACHMENT:
Attachment A — Report from Finance Committee Members Collopy, Reed and Tucker
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Attachment A
Report to City Council from Finance Committee Members Collopy, Reed and Tucker
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Report to City Council
From: Finance Committee Members Collopy, Reed and Tucker
August 30, 2019
Background:
At the City Council Study Session held on February 12, 2019, the Beacon Bay Homeowners' Association
(HOA) requested that the lease rental rate charged to lot lessees in Beacon Bay be reduced from 2.5% of
the sales price of a leasehold estate including improvements ultimately to 1% of such sales price or an
appraised value. The HOA presented assumptions and calculations that they contend demonstrate that
the City would not suffer a reduction below current revenue if such a rate reduction were implemented.
The City retained Keyser Marston Associates (KMA) to review the assumptions and calculations
submitted by the HOA. KMA calculated a significant loss of revenue to the City over the next 18 years
based upon the same proposed rental rate reduction.
The City Council referred the request of the HOA to the Finance Committee with a direction that the
Finance Committee form a subcommittee of its public members (Subcommittee) who would report their
findings directly to the City Council. The City Council requested that the Subcommittee attempt to
reconcile the differences between the calculations made by KMA and those of the HOA. Further, the
City Council also requested that the Subcommittee opine on the appropriateness of having an appraisal
prepared to provide up to date information as to the fair market rental value of the Beacon Bay lots.
The HOA believes rents charged on ground leased residential properties by the Irvine Company "should
be the primary comp in determining" the fair market rental value to be charged to Beacon Bay lot
lessees, and that the appropriate mechanism to ascertain those rents being charged by the Irvine
Company to its ground lessees is a rent study.
At the Finance Committee meeting of March 14, 2019, Mayor Pro Tempore Will O'Neill as the Chairman
of the Finance Committee appointed Bill Collopy, John Reed and Larry Tucker to the Subcommittee,
The staff provided the Subcommittee with all documents that had been submitted to the City by the
HOA or which were prepared by KMA or staff (and were part of the Study Session Agenda item) as well
as other related information, including the Appraisal Report of George Hamilton Jones (Jones) of the Fair
Market Rental Value of the Beacon Bay Lots dated as of July 1, 1993 (the Jones Appraisal).
Subcommittee members watched the video of the City Council Study Session. The Subcommittee also
requested additional information about current Beacon Bay rental rates, City records of sales of Beacon
Bay leaseholds and building permits issued on Beacon Bay lots. The Subcommittee then met with staff
and KMA to go over the information provided.
Next the Subcommittee met with former Councilman Ed Selich, whose District included Beacon Bay, in
order to learn about the discussions between the City and the HOA that took place prior to the approval
of the current 2012 lease template (approved by the City Council and the State Lands Commission in
mid -2012).
Then the Subcommittee met with representatives of the HOA to ask questions the Subcommittee had
based upon information received by the Subcommittee and to hear the thoughts of the HOA
representatives.
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Finally, the Subcommittee contacted the Irvine Company to confirm the manner in which the Irvine
Company determines rent adjustments on their remaining portfolio of residential ground leaseholds
Executive Summarv:
The Subcommittee concludes that the calculations of the HOA and KMA cannot be reconciled because
they use materially different assumptions. The assumptions reflect opinions of future market conditions
which cannot be known with any degree of certainty. Further, if the Council decides that discussions
with the HOA that could lead to a new rent rate formula are warranted, the Subcommittee recommends
that the City select a well-qualified credentialled independent appraiser to determine the fair market
rental value of the Beacon Bay lots consistent with the requirements of the Beacon Bay Bill (the "Bill").
For the reasons set forth below, the Subcommittee does not believe that a survey of existing ground
lease rents of Irvine Company residential properties would be useful. The appraisal question will be
discussed first and the HOA/KMA reconciliation question will be addressed second.
Framing the Rent Rate Issue:
The Bill requires that "[T]he consideration to be received by the city" for Beacon Bay lot leases "shall be
the fair market rental value of such lots as finished subdivided lots with streets constructed and all
utilities installed." The Bill further states that "[T]he form of such leases and the range of consideration
to be received by the city shall be approved by the State Lands Commission prior to the issuance of any
such lease." In 2012, the State Lands Commission approved of the form of lease now being used for all
new leases of Beacon Bay lots. In a letter to the City dated September 5, 2018 commenting on the
"possibility of lowering the consideration set forth in the existing" Beacon Bay lease template, the State
Lands Commission staff informed the City that the City "must provide ironclad and indisputable
justification and rationale to prove that the reduced [rent] reflects fair market value."
The HOA asserts that the ground rents being charged under Beacon Bay ground leases are "excessive,"
"unfair" and "indefensible," contrary to the requirements of the Bill that the consideration be the fair
market rental value. They base their conclusion on the fact that ground rents, as a percentage of the
sales prices of leasehold estates under nine (9) Irvine Company residential ground leases (described
below) are considerably lower (well under 1%) than the rents to sales price percentage of the sales of
leasehold estates in Beacon Bay (fixed at 2.5%). This would be a point worthy of further inquiry if the
Irvine Company ground rents have been set through a market rate process. Thus, the Subcommittee's
analysis necessarily focused on the nature of, and the manner in which ground rents are determined
under, Irvine Company ground leases in Newport Beach.
While the HOA claims the Irvine Company ground lease rents "are the market" and that therefore the
Beacon Bay rents are excessive by comparison, the Subcommittee also considered that the opposite
might be true, or more accurate: That the Beacon Bay ground rents are at market and the Irvine
Company ground rents are low. The Subcommittee also recognized that the Irvine Company ground
rents and the Beacon Bay ground rents cannot be easily compared with each other due to the very
different terms of the leaseholds involved. On the latter point, it should be noted, among other things,
that the terms, conditions, property locations, ability of a tenant to purchase its leased property,
duration of lease terms (and ability to extend a lease term), the ability to assume a lease at existing
rents and computations of rent and rent increases under the Beacon Bay leases and Irvine Company
leases have material differences, so the two lease formats do not readily lend themselves to direct
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comparison. They each involve residential ground leasehold estates to be certain, but under
fundamentally different economic terms and conditions.
Leeper Study and Review of Irvine Company Ground Leases:
In support of its contention, the HOA presented a 4 -page document to the City prepared by Chas Leeper,
SRA, which refers to itself as a "Ground Lease Rent Study" (Leeper Study). There is no introductory text
to the Leeper Study. The first three pages have pictures of nine (9) homes (seven (7) of which are either
located in Eastbluff or the Bluffs). Each of those properties was subject to a ground lease with the Irvine
Company at some point. The Leeper Study sets forth five (5) facts related to each of the properties
(taken from one (1) listing and eight (8) sales between early 2011 and early 2018). Those facts are: (i)
the sale or listing price, (ii) the sale or listing date, (iii) the lease amount (i.e. rent) per month, (iv) the
annual lease amounts and (v) the annual rent as a percent of sales or listing price. The fourth page of
the Leeper Study, entitled "Supplemental Addendum," contains brief text and concludes by noting that
the information provided is "not an appraisal and no value conclusion was made or intended." The
Leeper Study appears to have been prepared to document rent to sales price ratios for the nine (9)
leasehold sales. It does not provide information about what the fair market rental value of those
ground leased properties would be in the open market. The Leeper Study is attached.
The Subcommittee also reviewed the recorded ground leases of each of the nine (9) properties referred
to in the Leeper Study. The ground leases mostly had initial terms of 75-77 years and the rent
adjustments first generally occurred after 25 or 30 years, then 15 years later again, and 15 years later
again. The rents were to be fixed between adjustments. The rent adjustment provisions in Irvine
Company leases were intended to adjust the rent usually to 6% (but sometimes 7%) of the fair market
value of the leased property (without lessee's improvements) as of an adjustment date. Sometimes the
leases provided that the amount of the fair market value of a leased property was to be reduced by a
modest credit in a stipulated amount before applying the 6% or 7% rent factor. The most recent of the
nine (9) Irvine Company ground leases was entered into in 1972 and the oldest was entered into in
1958. Most of the leases were from the mid to late 1960's.
The HOA did not provide information for consideration by the City about any long-term ground leased
residential properties in Newport Beach not leased by the Irvine Company.
Committee of 4000 Settlement:
In the late 1970's, control of the Irvine Company changed from the Irvine Foundation to private hands.
By then, the Irvine Company had a portfolio of a few thousand residential ground leases. In the early
1980's, the Irvine Company did what the ground leases on their face allowed them to do - - determine
the fair market value of a leased property as of an adjustment date (less any stipulated credits), apply
the specified rent factor and adjust the ground rent accordingly. Many of the tenants of the leasehold
estates (informally known collectively as the "Committee of 4000") contested the legal basis for the
sizable rent increases that resulted from multiplying the then fair market value of the leased property by
the rent factor called for in the applicable lease. Ultimately, a class action lawsuit was filed against the
Irvine Company by the Committee of 4000.
In 1983, the Irvine Company settled the dispute with the Committee of 4000. The recorded settlement
document was provided to the Subcommittee. The settlement included a new form of lease for each
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leasehold tenant subject to the settlement. Among other things, the settlement granted to each
leasehold tenant an option to purchase their property. In addition to a "Development Credit" there was
also a "Conversion Discount" the purpose of which was "to encourage" the leaseholders to purchase
their homesites, according to the settlement. Based upon the fact that all but approximately 95 of the
ground leased properties in question have been acquired from the Irvine Company in the intervening
years, the goal of the settlement will soon be achieved.
For those who chose not to purchase, a new rent was to be set as of September 30, 1983 per the
settlement based upon the fair market value of the leased property (excluding lessee's improvements)
at that date multiplied by the rent factor; however, the settlement also granted a broader array of
possible discounts/credits that would reduce the fair market value of a leased property before
application of the rent factor. Further, the settlement reduced the rent factor to 4% of fair market value
of the leased properties after applying the new array of discounts/credits, not the 6% or 7% called for in
the original leases. The Jones Appraisal discusses the history of Irvine Company residential ground
leases in some detail.
The Irvine Company confirmed to the City that beginning in 1984 their annual ground rent adjustments
have been computed based upon changes in a cost of living index as stipulated in the settlement. The
legal department of the Irvine Company recently advised the City that "we [Irvine Company] had a very
complicated formula for determining fair market rental value back in 1983, but for the last 35+ years,
we've been locked into CPI adjustments. We haven't been in the business of establishing fair market
rental value since the 1983 settlement agreement and we don't plan to execute any new residential
ground leases or extend any of our current ground leases beyond their current term." In short, the rents
charged by the Irvine Company have not been based upon a fair market rental value of the properties
involved for over 35 years.
Jones Appraisal MethodologV
Jones was retained by the City to appraise the fair market rental value of the Beacon Bay lots in
connection with the 1994 lease template. Jones was instructed to base his conclusions "on an analysis
of comparable lease data, rather than a reflection of the unencumbered fee value based upon an
analysis from sales of comparable sites." Jones notes that such an approach entailed searching "for
other leasehold residential projects for purposes of judging the level of rental actually being paid for
property which could be compared to the subject lands" (i.e. Beacon Bay). However, as Jones further
notes, "[D]ue to the lack ofd recently negotiated residential leaseholds within the Newport Harbor
area, no direct property to property comparisons could be made" (emphasis added), even though Jones
observed that there were +/- 395 Irvine Company residential ground leases still in effect as of January
1993, but apparently none were "recently negotiated." Jones concluded that the "relationship of land
rent to unencumbered fee lot value established by the TIC standardized lease" [referring to the lease
form that was adopted as part of the settlement] is not a proper indication of 'market rental rate'."
Due to a lack of recently negotiated residential leaseholds, Jones found it "necessary to go to a
secondary approach" which entailed determining the fee value of a Beacon Bay homesite, then
determining a rental factor to convert the fee value in the open market to a fair market rent. His
conclusions were supported by a detailed analysis.
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The Beacon Bav Marketplace:
In connection with its work, the Subcommittee also looked into the marketplace for Beacon Bay
leaseholds. A Sales History provided to the Subcommittee by staff (attached) demonstrates that an
active market has existed in Beacon Bay leaseholds over the last 7 years, since adoption of the 2012
lease template. That Sales History shows that 24 sales of Beacon Bay leaseholds have occurred since
2012, or one-third of the 72 homesites in that community. The Subcommittee did find that fact difficult
to reconcile with the statement made by the HOA representative at the Study Session that Beacon Bay
rents are "4 to 7 times above market." Generally speaking, if a product is clearly overpriced it cannot be
expected to readily sell. Former Mayor Selich informed the Subcommittee that the City was not
requested to modify the 2.5% rent formula in connection with the 2012 lease template. According to
the staff report, that rent formula has been in effect since 1981.
Conclusion on Irvine Comnanv Rent Studv, or Appraisal:
Based upon the information available to the Subcommittee as set forth above, the Subcommittee does
not believe that use of a rent study based upon Irvine Company ground lease rents that have not been
set pursuant to a fair market value analysis for over 35 years would meet the high standard required by
the State Lands Commission as a prerequisite to establish a new formula to determine fair market rental
value of Beacon Bay lots. It would be unrealistic to conclude that rents set by settlement of litigation
35+ years ago be viewed as a valid comp in appraising the fair market rental value of the Beacon Bay lots
today. In short, the Subcommittee does not concur with the HOA (i) that the Irvine Company ground
rents "are the market" or (ii) that the Leeper Study of Irvine Company rents and leasehold sales provides
the "primary comp" bearing on the fair market rental value of Beacon Bay lots today.
Accordingly, if the City Council chooses to pursue further discussions with the HOA that could lead to a
new Beacon Bay rent formula, the Subcommittee recommends that a well-qualified credentialled
independent appraiser be selected by the City to determine the fair market rental value of Beacon Bay
lots using a methodology that would meet with the approval of the State Lands Commission.
Scope of A raisal;
If an appraiser is commissioned, the appraiser should be allowed to consider any information that the
appraiser might find useful in ultimately opining on the fair market rental value of the Beacon Bay lots.
That can be expected to include the ground rents that have resulted from sales that have been
negotiated between open market buyers and sellers of leasehold interests in Beacon Bay over the last 7
years, as well as those terms and conditions of the 2012 lease template that the HOA believes are overly
burdensome, and therefore should be found to reduce the fair market rental value of the Beacon Bay
lots (such as annual cost of living adjustments and possessory interest taxes).
The HOA also suggests that the rents charged for the Basin Marine Lease in the Balboa Yacht Basin
contiguous with Beacon Bay should be considered in determining the appropriate ground rent for the
Beacon Bay residential lots. The relevance of the lease rate for the Basin Marine commercial use in
determining the fair market rental value of the Beacon Bay single family detached residential lots would
also be within the scope of the appraiser.
Finally, it should be noted that the Subcommittee was not asked to comment on who should bear the
cost of any appraisal and therefore does not do so.
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HOA/KMA Calculations:
Even though the Subcommittee has concluded that the Irvine Company leaseholds do not provide
relevant up-to-date information to determine the appropriate rent factor in Beacon Bay, the
Subcommittee will nonetheless comment on the calculations presented by the HOA and KMA as
requested by the City Council.
The HOA proposes that the rate used to compute ground rents in Beacon Bay be reduced by 60% over a
5 -year phase in period for those who signed the 2012 lease template (from 2.5% to 1% of the sales
price). That would mean that the ground rent of one-third of Beacon Bay homeowners would decline by
60% within 5 years. The remaining leaseholders would have the option to convert to a new 50 -year
lease on the 2012 template with a 1% rent factor based upon an appraised value of the land and
improvements. And any new sales would have a rent of 1% of the sales price.
Under the HOA assumptions, the HOA contends the City will not lose revenue due to that rent rate
reduction. Rather, the HOA assumes that lowering the rent factor would result in a material uptick in
sales activity in Beacon Bay and that the properties with the oldest leases (i.e. likely currently generating
the lowest rent amounts) would be the homes to sell first. The HOA also projects that higher prices on
sales or appraised value on conversions would result. They believe that a combination of sales of the
lowest rent generating homes first with a higher volume of sales and greater sales prices or appraised
values would mean that any revenue that would be lost due to a reduction of the rent factor would be
more than offset by other revenue gains and therefore the City would ultimately not lose revenue. KMA
does not assume the lowest rent generating units will necessarily sell first and assumes a smaller
turnover and a lower sales price/appraised value conversion scenario than the HOA.
In short, the HOA and KMA numbers are not reconcilable because the assumptions made by each are
materially different. The Subcommittee has no special expertise to allow it to decide between two
varying sets of assumptions. The Subcommittee notes, however, that if the City were to proceed as
proposed by the HOA and the HOA assumptions ended up being entirely or partially wrong, the
consequences of a loss of revenue based upon incorrect assumptions would be borne only by the City
and the State Lands Commission.
Additional Information.
Additional information about Beacon Bay property values and rent considerations is set forth on Pages 7
and 8 of this Report for Council's edification.
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Additional Information about Beacon Bay PropertV Values and Rents
The value of a finished lot in Beacon Bay, if it were not ground leased (i.e. fee value), should be the
amount the lot would sell for in the open market as a "finished subdivided lot with streets constructed
and all utilities installed" (quoting from the Beacon Bay Bill). However, once a finished lot is ground
leased by the City to a homeowner, then the value of that lot would be divided between two estates
(interests): (i) The lessee's leasehold interest in the property and (ii) the City's remainder interest in the
property as the fee owner, burdened by the lease. The lessee would have a possessory interest that
grants the lessee the right to improve and occupy the property for 50 years as detailed in the ground
lease, with the burden of paying rent and absorbing the other costs of owning a property in a
subdivision with common facilities. The value of the lessor's interest in the fee title (as burdened by the
lessee's interest in the lease) should be based upon the rent stream due to the City as lessor, net of
expenses. The value of the lessee's interest in the finished lot plus the value of the lessor's interest in
the fee title burdened by the lease, when added together should be the same as the fee value of the lot
in question in a finished subdivided condition, not subject to a lease.
A complicating factor arises when the leased property includes improvements to the lot. Since those
improvements redound to the benefit of the lessee during the lease term, the value of the lessee's
estate should reflect the lessee's interest in those improvements. However, the value of the City's
interest should continue to be based upon the value of the income stream to the City as the lessor.
The Subcommittee became aware that two sales of bay fronting Beacon Bay leaseholds occurred in
2016 that were followed by demolition of the improvements on those lots and thereafter, new homes
have been built. So, the fee value of those lots should be easier to analyze since there are no residential
improvements that would have affected the value ascribed by the buyers to those lots. One of those
lots will be used to demonstrate an approach to estimating the approximate fair market value of the lot
in question if it were appraised.
For the lot in question, the value of the lessee's interest was $4.4M in 2016 as established by a buyer
and seller in an open market transaction. In other words, $4.4M was the actual price that the buyer
paid in 2016 for a leasehold estate in that lot - - i.e. the right to enter into a new lease of the lot for 50
years using the 2012 Beacon Bay lease template. That buyer is presumed to have ascribed no value to
the improvements since the improvements were demolished by the buyer not long after acquisition to
make way for a new home to be built on the lot. In effect, not only did the buyer pay $4.4M for the
right to enter into a new lease, that lease also came with a duty to pay an initial rent of $110,000 per
year, with annual cost of living increases, plus the other costs of property ownership (such as property
and possessory interest taxes). An appraiser would provide a response to the question, how much more
would an informed buyer of a leasehold estate in an open market transaction have paid in order to also
have purchased the lessor's fee interest in the lot in question?
The value of the lessor's interest in the leased lot in question in 2016 would be the value of an income
stream of $110,000 per year net of costs. The value of the lessor's interest would be a function of the
rate of return on the lessor's interest in that annual income stream prevailing in the marketplace at that
time. For example, if the marketplace rate of return were assumed to be 6%, that would equate to a
value of the lessor's interest of approximately $1,833,333 (e.g. $1,833,333 x 6%= $110,000). So, the
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total value of the fee interest of the lot in question with no improvements (since they had no value to
the buyer) at a 6% rate of return on an income stream of $110,000 per annum would be the value of the
tenant's interest plus the value of the landlord's interest, or $4.4M + $1.83M, or $6.23M. An appraiser
would determine the appropriate rate of return by which to value the lessor's income stream, so the
value of the lessor's interest in the leased fee could change depending on the appraiser's conclusion.
However, the value of the lessee's interest was fixed by an actual transaction in the marketplace. So,
the fair market value of the lot would be the value of the lessee's interest ($4.4M) plus the value of the
lessor's interest (which as noted would depend on the rate of return on the annual rent that is
assumed).
The HOA proposed that the fair market annual rent should have been $44,000 in 2016 for the lot in
question (1% of the sales price of $4.4M), while the Beacon Bay 2012 lease template set the annual rent
in 2016 at $110,000 (2.5% of $4.4M). If an appraiser could find no or an insufficient number of
comparable residential ground leases to establish the appropriate rent for the lot and chose instead to
use the Jones Appraisal approach to set the rent, the fee value of the lot (finished but without a lessee's
improvements) would be multiplied by a rental factor to determine the ground rent. If, for example,
that rental factor were assumed to be 4% (that is, the same rental facto- used in the Jones Appraisal for
waterfront Beacon Bay lots in 1993), and that rental factor were appliec to the fee value of the lot
calculated as described above, that would result in an annual ground rent well above the actual ground
rent of $110,000 that was set in 2016 for the lot in question.
The lot in question now has a new 4,261 s.f. home (+ 600 s.f. garage) on it according to City records, If
that leasehold were sold today, the price might be closer to $8M -$9M (the $4.4M cost of the leasehold,
plus the value of the new home, plus any leasehold appreciation, less the burden of a higher rent on a
sale), and therefore the rent might be closer to $200,000 to $225,000 per annum (2.5% x
$8M=$200,000/yr.; 2.5% x $9M=$225,000/yr.), rather than the existing rent of $117,000 +/
The example in the preceding paragraph demonstrates that the rent for a lot that is redeveloped is
lower if the buyer builds a new home (which happened), than if the seller had built the new home and
then sold the leasehold estate to the buyer as soon as the new home was completed. As can be seen,
the rent can be materially different under those two scenarios even thoigh each scenario would involve
the same lot, with the same improvements and the same timeline for completion and occupancy of the
new home. That differential highlights an anomaly brought about by using a rent setting mechanism
based upon the sales price of a leasehold estate that may include valuable improvements made by the
tenant (or his/her predecessors). In other words, the sales price (and therefore the ground rent) can be
materially affected by the condition of the improvements located on the lot at the time of sale, even
though the lessor has not paid for those improvements. However, using the sales price of a leasehold
estate has the benefit of administrative simplicity. Setting rent is formulaic: Sales price times 2.5% _
annual rent; and the rent is not subject to an appraisal (or an argument about an appraisal or what part
of the value should be attributed to improvements). Adjustments to the rent are based upon changes
in the cost of living, rather than being adjusted based upon appraised fair market value of the property
(not including lessee's improvements) at specified future dates.
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Ground Lease Rent Study -1
ijjent Beacon Bav HOA
Property Address (around Lease Rent Stud
CAy Newport Beach County Orange State CA Zio Code
Appraiser Chas W Leeper, SRA
Sales with ground lease
2520 Vista Del Oro, Newport Beach 92660
Comments:
Sales Price: $500,000
Sale Date: 12/19/14
Lease amount per month: $150
Annual lease amount: $1,800
Annual rent as percentage of sales/listing price: .36%
2018 Vista Caudal, Newport Beach 92660
Comments:
Sales Price: $795,000
Sale Date:9/30/15
Lease amount per month: $191.70
Annual lease amount: $2,300
Annual rent as percentage of sales/listing price: 28%
59 LINDA, Newport Beach 92660
Comments:
Listing Price: $5,800,000
Listing Date:1/5/11
Lease amount per month: $3,333.66
Annual lease amount: $40,003,92
Annual rent as percentage of sales/listing price: ,69%
458 Gaviota, Newport Beach 92660
Comments:
Sales Price: $710,000
Sale Date:8/31/17
Lease amount per month: $1,440
Annual lease amount: $14,440
Annual rent as percentage of sales/listing price: .20%
Form PICFOUR -"TOTAL" appraisal software by a la mode, inc. -1-800-ALAMODE
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Ground Lease Rent Study -2
Clerq Beacon Bay HOA
Property Address Ground Lease Rent Stud
City Newport Beach County Orange State CA Zip Code
Appraiser Chas W Leeper, SRA
Sales with ground lease
2002 Vista Caudal, Newport Beach 92660
Comments:
Sales Price: $660,000
Sale Date: 12/8/17
Lease amount per month: $208
Annual lease amount: $2,496
Annual rent as percentage of sales/listing price: 37%
1
407 Vista Suerte, Newport Beach 92660
Comments:
Sales Price: $769,650
Sale Date:8/30/16
Lease amount per month: $187.87
Annual lease amount: $2,254.40
Annual rent as percentage of sales/listing price: .29%
600 Hilvanar, Newport Beach 92660
Comments:
Sales Price: $579,000
Sale Date:1/30/18
Lease amount per month: $142.26
Annual lease amount: $1,707.10
Annual rent as percentage of sales/listing price: .29%
rI
2521 Crestview Or, Newport Beach 92663
Comments:
Sales Price: $1300000
Sale Date:3/4/15
Lease amount per month: $460
Annual lease amount: 5,520
Annual rent as percentage of sales/listing price: .42%
Form PICFOUR -"TOTAL" appraisal software by a la mode, inc. -1-800-ALAMODE
10-13
Ground Lease Rent Study -3
Client
Beacon Say HOA
Property Address
Ground Lease Rent Study
Cb
Newport Beach County Oran a State CA Zip Code
Appraiser
Chas W Leeper, SRA
Sales with ground lease
. 'rte• . - - -- __�. ��
2427 Blackthorn St, Newport Beach 92660
Comments: Comments:
Sales Price: $1250000
Sale Date:4/22/15
Lease amount per month: $819.26
Annual lease amount: $9,831.12
Annual rent as percentage of sales/listing price: .76%
Comments: Comments:
Form PICFOUR -'TOTAL" appralsal software by a Is mode, Inc. -1-800-ALAMODE
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Supplemental Addendum File No.
Beacon Bay HOA
Property Address Ground Lease Ret Stud
CRY Newport Beach Counly Orange State CA Zip Code
Appraiser Chas W Leeper, SRA
SUMMARY:
The ground lease rent data encompasses nine comps all within city limits of Newport Beach. The ground lease
information provided did not include manufactured housing or mobile homes as they are considered too far removed
for comparable purposes. Monthly and annual lease rates are included, along with the sales price for each comp. For
all nine comps, the annual rent as a percentage of the sales price was less than 1% of the sales price. The average
rent was .40% of the purchase price. According to available information, lease amounts were assumable to the new
buyer and were not subject to adjustment to the purchase price.
The rental information provided is research provided the client and not an appraisal and no value conclusion was
made or intended. The information was taken from the MLS
Form TADD -"TOTAL" appraisal software by a la mode, Inc. -1-800-ALAMODE
10-15
10-16
Beacon8ay$akHismxy CncL$$)byYear
2005
2006
2007 2008
2009 2010 2011 2012 2013 2014 2015
2016 2017 2018 2019
A $4595M
23$1.8M
2$2283M 54$1.7M
N/A N/A 1-$155M 12$3A88M B $45M 18-$3.095 49-$l A5M
16$3.9M 22$525M 58$2.95M 3$4.625M
1$21M
49-$1.728M
48-$12M 66$218M
23sa1348M 14$331M 2$2.77M 21$4M 62$3.6M
20--$4 AM 53$2M 3$3.8M
ll $3277M
66$1.745M
54$1.7M
41$900k 24$1.9M 48$1.175M
52$2.48M
21$35M
37$1.71M
=3 -5'-m v.6M !
49$135M
38$12M
66$1.65M
60-6135M
66-$2M
10-16