Selling Guide

Published December 16, 2020

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What is the meant by option to purchase fee interest?

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).
  • The initial land rent should be established as a percentage of the appraised value of the land on the date that the lease is executed.
  • The purchase price may be adjusted annually during the term of the lease to reflect the percentage increase or decrease in the index from the preceding year.
  • Leases may be offered with or without a limitation on increases or decreases in the rent payments.
Will be constructed after the lease is executed.

The purchase price of the land should be the lower of the following:

  • the current appraised value of the land, or
  • the amount that results when the percentage of the total original appraised value that represented the land alone is applied to the current appraised value of the land and improvements.

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).

Note: If the lease is tied to an external index, the initial land value may not exceed 40% of the combined appraised value of the land and improvements.

For more information, see B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates.

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