Lease Encumbrance Impacts Property’s Fair Market Value Purchase Price

March 22, 2022

What Happened: In 1990, a real estate developer signed a 99-year lease on property in Boca Raton on which it intended to build a shopping center. The lease fixed rent at $280,000 for years 2 through 29, and $910,000 per year after that; it also gave the developer the right to purchase the property at “fair market value” (FMV). The question: Should the FMV price account for the fact that the property was encumbered by the lease? The court said yes and issued a “declaratory judgment” in the developer’s favor.

What Happened: In 1990, a real estate developer signed a 99-year lease on property in Boca Raton on which it intended to build a shopping center. The lease fixed rent at $280,000 for years 2 through 29, and $910,000 per year after that; it also gave the developer the right to purchase the property at “fair market value” (FMV). The question: Should the FMV price account for the fact that the property was encumbered by the lease? The court said yes and issued a “declaratory judgment” in the developer’s favor.

Ruling: The Florida appeals court rejected the landlord’s appeal.

Reasoning: Although the lease didn’t specifically include words like “burdened by” or “encumbered by,” it did say that the FMV appraisal would consider that “the Fixed Rent for the balance of the Lease Term shall be deemed to be $910,000, notwithstanding the fact that actual Fixed Rent may be less than that amount until the thirtieth (30th) Lease Year.” And that language was enough to show that the parties’ clear intent was to value the property as encumbered by the lease, the court concluded.

  • Boca Raton Cmty. Redevelopment Agency v. Crocker Downtown Dev. Assocs., 2022 Fla. App. LEXIS 861, 2022 WL 386050

 

 

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