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Leased Fee or Fee Simple - That is the Question

Discussion in 'Commercial/Industrial Appraisals' started by PS111222333444, Nov 20, 2011.

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  1. PS111222333444

    PS111222333444 Sophomore Member

    1
    Sep 2, 2010
    Professional Status:
    Certified General Appraiser
    State:
    Washington
    Hello:

    I'm a contract fee appraiser that does work for a two three person shop. We occasionally appraise mixed use buildings. Each time we do, the principals of the firm insist we are to appraise the Leased Fee Interest as it is an investment property, regardless of being owner occupied in the commercial element. The subject this time is a MU building with a ground floor office representing 51.6% of the NRA. It has been owner occupied for 35 years and there is no lease document. There are also four apartment dwellings rented on a month to month basis.

    The dictionary describes Leased Fee as “An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the Lessor (the leased fee owner) and the lessee (landlord) are specified by contract terms contained within the lease”.

    So, I’m unclear as to why a Leased Fee Interest should be applied vs. Fee Simple Estate. And on the flip side, if the Property Rights stated are Fee Simple, can a final value be reconciled to the Income Approach?

    Thanks for the input.
     
  2. PropertyEconomics

    PropertyEconomics Elite Member

    1
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    It is fee simple as best as I can tell ... the apartments are month-to-month and the majoirty of the building is owner occupied.

    Im not sure how they can get "leased fee" out of that scenerio.
     
  3. sail143

    sail143 Junior Member

    8
    Oct 6, 2011
    Professional Status:
    Certified General Appraiser
    State:
    Rhode Island
    Under the occupancy you state this is Fee Simple. Income approach rents should be at market.
     
  4. PS111222333444

    PS111222333444 Sophomore Member

    1
    Sep 2, 2010
    Professional Status:
    Certified General Appraiser
    State:
    Washington
    Thanks for the input. I agree with both comments. I did apply market rent to the owner occupied space. I applied contract rent to the apartment units and then analyzed if they were bracketed by market comparables. I think the problem is I reconciled to the Income Approach to value, which insinuated a Leased Fee Interest to my higher ups.
     
  5. skx172

    skx172 New Member

    0
    Mar 5, 2008
    Professional Status:
    Appraiser Trainee
    State:
    New York
    in regard to reconciliation- if this is a type of property that would most likely trade to a owner user, emphasize the sales comp approach, if it will most likely trade to an investor go with the income approach. (assuming you did not run into any weak data in any of the approaches)

    and yes this sounds like a fee simple as of the date of value, but in the valuation scenario you presume it becomes a leased fee (someone buys it and leases up the space)
    report should label it fee simple

    no reason not to reconcile a fee simple to the income approach just remember to deduct your lease-up costs (broker commission, downtime, concessions)
     
  6. Howard Klahr

    Howard Klahr Senior Member

    110
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    As previously noted by PE, no lease (long term), then it is not a leased fee. Unclear on why your supervisor/mentor insists that it is. You should have this conversation with them and then indicate their rationale. Maybe then we could assist in helping you to understand their intent (if rational).

    Assuming that the apartment leases are not longer than one-year, you should have applied market rent to all of the units. Especially if you were leaning toward a fee simple value.

    This point however is entirely not correct for a market value analysis of an owner occupied property. You would only deduct these items if the space was vacant as of the valuation date to provide an "as is" value
     
  7. PropertyEconomics

    PropertyEconomics Elite Member

    1
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    The property the OP has is very much a hybrid being commercial and residential ... partially owner occupied and partially tenant occupied.

    I agree with Howard, there is no discount for lease up costs ... first the tenants are in place, second the owner is in place, and finally, the value method whether income or sales does not in and of itself determine leased fee or fee simple.

    I am curious if an adjustment was made in the sales comparison approach based on the rental units of the apartments and whether that adjustment was derived from income analysis or sales analysis.
     
  8. skx172

    skx172 New Member

    0
    Mar 5, 2008
    Professional Status:
    Appraiser Trainee
    State:
    New York
    Why is a lease-up cost deduction wrong for a owner occupied property whose H&B use is for investor ownership. :shrug:

    a)
    Most banks would want to see the lease-up cost deducted because they would want to know what would happen if they foreclose on the property which in all likelihood will occur contemporaneous with the loss of the occupying tenant

    b)
    but even for a non bank appraisal if a property is offered for sale that has a investor owner as the H&B use then the purchaser would have to factor in the cost/probability of getting the existing tenant into a market lease

    realistically the lease with the owner/user would be negotiated as part of the sale and the owner would get more money if he signed a market rate lease versus if he sold the building without a lease negotiated up front.







     
  9. David Mescon

    David Mescon Senior Member

    4
    Nov 12, 2009
    Professional Status:
    Retired Appraiser
    State:
    California


    Although I'm not familiar with the subject's market, in the markets in which I have experience, this would likely be an owner-user property. Typically, with a combination of owner-user and a small number of month to month residential units, such properties tend to be owner managed. Without any mitigating circumstances, it is likely that all of the residential units would remain occupied throughout a foreclosure process, and, the larger space would be occupied by the new owner, hence, no lease-up costs or absorption analysis.
     
  10. John Glass

    John Glass Sophomore Member

    0
    Dec 23, 2005
    Professional Status:
    Certified General Appraiser
    State:
    Louisiana
    The last sentence is troubling. The Income Approach and Leased Fee Interest are not synonamous.
     
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