Option to Purchase Fee Interest
The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. If the option is included, the purchase must be at the borrower’s sole option, and there can be no time limit within which the option must be exercised. If the option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold. Both the lease and the option to purchase must be assignable.
The table below provides the requirements for establishing the purchase price of the land.
| Status of Property Improvements | Purchase Price of Land |
|---|---|
| Already constructed at the time the lease is executed. | The initial purchase price should be established as the appraised value of the land on the date the lease is executed. |
| Already constructed at the time the lease is executed, and the lease is tied to an external index, such as the Consumer Price Index (CPI). |
|
| Will be constructed after the lease is executed. |
The purchase price of the land should be the lower of the following:
For example, assume that the total original appraised value for a property was $160,000, and the land alone was valued at $40,000 (thus representing 25% of the total appraised value). If the current appraised value is $225,000, $50,000 for land and $175,000 for improvements, the purchase price would be $50,000 (the current appraised value of the land, because it is less than 25% of $225,000). |
For more information, see B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates.