Fee Simple vs Leasehold

[Kenneth Reynolds]

Am I making this more difficult than it should be? I am appraising a SFR which is occupied under a net lease option agreement with a part of the rent to be applied to the purchase stated in lease. I have read the lease agreement and it appears to be a straighforward net lease.
The lender who will be making a loan for all or part of the buyer's purchase price is our client.
Since my appraisal takes place prior to closing, the owner's interest is leased fee is it not? Fee simple ownership by the buyer takes place after closing.
As a newbie I would appreciate some help to clarify and possible some words/recommendations on how to address this in my appraisal.

 

[Joyce Potts]

Am I making this more difficult than it should be? I am appraising a SFR which is occupied under a net lease option agreement with a part of the rent to be applied to the purchase stated in lease. I have read the lease agreement and it appears to be a straighforward net lease.
The lender who will be making a loan for all or part of the buyer's purchase price is our client.
Since my appraisal takes place prior to closing, the owner's interest is leased fee is it not? Fee simple ownership by the buyer takes place after closing.
As a newbie I would appreciate some help to clarify and possible some words/recommendations on how to address this in my appraisal.

I vote no. The current seller/owner owns the fee simple interest in the property, even though it's currently encumbered by an existing lease.

If I understand this correctly.

That lease doesn't restrict his ability to convey the fee simple interest.

 

[Tater Salad]

I agree with Joyce. Also, the buyer is buying the fee simple interest, and that is what's being financed.

 

[Steve Owen]

Leased fee and leasehold interests need to valued in some cases because that is the value that is really there for those various parties when there is a long term lease. However, in the situation you are talking about, the lease is relatively short term.

Steven Santora has taken some objection to the first sentence above on various occasions; I'm too lazy to look them up right now. However, if I understand his reasoning correctly, leased fee is essentially the same thing as fee simple encumbered by a lease... similar to what Joyce said. I would tend to agree with that in a case like this.

Think about it this way: what is going to be conveyed? What will be sold is not the property with the lessee's rights still intact. At the point the lessee takes ownership he or she will have the entire bundle of rights.

 

[Michigan CG]

Currently the owner of the property has a leased fee interest and Mr. future homeowner has the leasehold interest. The transaction is for the Fee Simple estate at which point the leased fee and leasehold ownership rights are terminated.

Appraise it Fee Simple.

 

[xm72mhd]

Wait. This lease is more than that. It includes a sale or option or something, but that is all basically irrelevant since you nare appraising the fee simple for financing purposes. If I get the drift of your post, you are supposed to be appraising what is being purchased, not the lease or the leased fee or the leashold interests.

 

[Kenneth Reynolds]

Thanks so much. This site is teaches more in a few clicks than many of the classes I've attended.
My hope is to one day assist someone in need too.
Thanks again.

 

[Michigan CG]

BUT...don't forget to mention the lease in your "Additional Comments" section of the report. You must disclose this as it is a part of the delineation of title, and although it is not a sale or transfer that has been recorded, it is still a transaction regarding the subject property which must be disclosed.

 

[Fred]

Nothing like the confusion that ensues once people start saying, “leased fee.”

Appraise it Fee Simple.

If I understand this comment, that means appraise as if the two partial interests, have been hypothetically rejoined.

Both the buyer and seller already have a partial interest in the property, what is being sold is one of the partial interests, not “the” fee simple.

The problem is the bank wants to lend against an interest that won’t come into existence until after the sale is completed. I’d make the appraisal prospective, as of the moment of closing (without specifying the date, but putting a limit on it of perhaps one month; and using the assumption that no significant changes to the property or the economy occur in that month) to do an appraisal that would be otherwise "in fee simple." I am sure that will challenge the perspectives of those not accustomed to appraising outside the confines of Fannie guidelines.

FWIW, if someone appraised it now, as it the inerests were already re-joined, that might be a mistake because of the general requirements for "as is" value, but IMO it might not be a very significant mistake.

 

[Steve Owen]

Yes, indeed. Just because you are appraising the fee simple interest does not mean you can ignore the lease. In this case, the least is part of the purchase agreement, if I understood the situation correctly. USPAP says that you must analyze the purchase agreement, so therefore you must consider the lease. Appraise the fee simple, but describe and analyze the lease as part of the agreement.