Los Angeles, California - After seeing the success of our investment properties in Los Angeles, our brokerage clients have asked about investing here as well. One such property we looked at had a land lease. River Park is the center of the Taylor Yard, LA River revitalization program. Partnering with developers, the city is converting its old train yard into housing and park space. Upon deposit, we were given a “welcome book” that told us the land the single family residence homes are sitting on is under a land lease.
“What happens at the end of the lease period?” - Client
Bad News First:
I'll give you the bad news first. The mortgage on properties on land lease is different than a single family residence or a condo, so it is subject to stricter review by the lender. As the lease from 99 years winds down to about 50, because land ownership is not included, it can reduce the price of the home relative to market rates, as much as 20%. The price of these homes would not be based on value of the land like real property, but market demand. When the owner is ready to sell the home, the difference in mortgage type and land lease will narrow down your buyers. Barring any dramatic changes, or if there is an agreement for land lease purchase, this property should be looked at most as a 10-15 year investment.
Good News Next:
1. Comps show that appreciation has followed the market: Great thing about comping out the Riverpark development is that half of them were first completed in 2015/2016. This $585k property(sold in 08/2015) has appreciated to $759k(app price of new construction at River Park that your mom saw). The realtor/redfin/zillow estimate is approximately $800k. Using $759k to be conservative, we can see that that the appreciation in 21 months is 29.7%. In nearby Silverlake, our townhouse investments have increased about 30% in value. So the growth in this area is not far behind and the value proposition holds even though it is on leased land. Using comps like these, we can get a better look at the future. Because there have not been many resales recently, we cannot get comps on the sales process such as days on market. But, lease prices have followed, a 3 bedroom and 4 bedroom were listed at $3800 and $4000, respectively in the last two weeks.
2. Land owner is city government/ public entity: The land owner is a public city entity, not a private, for profit entity. The Taylor Yard developments are joint venture developments between the Los Angeles Metropolitan Transportation Authority, LA Urban Homes, and McCormack Baron Salazar. With app 95 private homes on this development, it is highly unlikely that a government entity will be able to threaten the livelihood of the residents by demanding unreasonable terms at the end of the lease.
3. All lease and land hold fees/ payments have been completely paid off: Often times in land lease agreements, the lessee is responsible for additional land improvement payments. These are often yearly payments as well as any additional maintenance payments. This often increases HOAs or Co-op fees. The developers and LA Metro have come to an agreement.
4. Taylor Yard is the center of the LA River Revitalization plan: These developments are very close to downtown Los Angeles and multiple hot spots of new gentrification. Within a 3 mile radius, you have a major city center, dodger's stadium, more than 10 state/city/local parks, Costco, multiple small walkable town villages, 3 Targets, etc. Here is a description of the revitalization plans up and down the River. Here is a picture of the immediate area of development that River Park is on. The River Park homes are immediately adjacent to the park, with 25,000 sqft of retail space committed another couple blocks away.
Interested purchasing a home in Los Angeles? Contact jason@torcora.com