Valuing a Reversionary Interest

The value of an interest in real property that comes in the future is a prospective value.  Usually an appraiser knows the date that a property interest will revert, since it's often based on the terms of a long-term lease.  There are however other situations, like valuing a life estate, when an appraiser does not have a specific date.  In these cases an appraiser has to rely on life-expectancy guidelines.  The reversion may be certain but it may depend on how long a person or persons will live.

There are other cases when a reversion depends on the action of a third-party to abandon a property or to change its use.  Deed restrictions for example often state that if a property is no longer used for a highway, a railroad or another stated purpose that the property reverts to its original owner.  Reversions of this type can create a real ownership mess when a railroad right-of-way for example is abandoned after 50 or more years of use.  Highways are often abandoned when new ones with a superior route are developed and the same situation occurs.

If you have a provision calling for a reversion in your sales agreement or in your deed and it appears that a reversion may occur it is possible to value the reversion subject to the reversion actually taking place.  Until a property right has actually reverted the value is speculative and hypothetical.  If the reversion can possibly happen over a period of time, prospective values can be forecasted but again they are hypothetical if the reversion has not occurred.

While some professionals in the real estate and real estate appraisal industries have not had much experience with reversions others have dealt with them over and over.  There are times when a reversionary clause has been triggered and the underlying owner of the reversion interest is unaware and thus takes no action.  'Let sleeping dogs lie" is often the advice of some, and they can continue to use a property for 100 years if no one figures out that it should have reverted.  It's one of those situations in life where you should have benefited from a reversion but no one (like your great grandfather) told you that a reversionary interest existed and no one who benefits from it is going to tell you. 

Appraisers often shy away from completing appraisal reports on interests that rely on hypothetical conditions.  If you have someone spin a story about the reversion of a very valuable property you have to ask yourself as an appraiser "how likely is this to happen?"  Am I valuing an interest that will never exist and if so for what purpose?  It's one thing to value a property that will eventually transfer but another to value it when there is no evidence that the reversion will ever occur.  If they abandon a railroad rift-of-way but they don't pull the tracks has there really been an abandonment?

Being asked to provide the present value of a long-term leases cash flow is not an unusual request, even when the lessee is a major casino or a major railroad over a long-term, but things can again become dicey for an appraiser when the underlying asset value is questionable.  A 30-year leasehold income stream with a building asset on the property that will last only another 10-years requires a closer look.  If it's Downtown Las Vegas on Fremont Street maybe it's not important what is on it at the moment.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

Article source: http://www.appraisalarticles.com/Reversions/4646-Valuing-a-Reversionary-Interest.html