Fee Simple vs Leased Fee

[Fee4me]

The property is encumbered by a lease and cannot be held in typical fee simple ownership without assembling the leased fee and lease hold interests. Therefore, valuing a fee simple interest in the subject is hypothetical, as it assumes that a transaction for the fee simple interest could transpire between a buyer and a seller when in reality, it could not.

 

[Ken B]

Technically, MV assumes a hypothetical sale, does it not? Thus, hypothetically, if the hypothetical most probable purchaser is an owner-user and the lease could hypothetically be easily vacated as it is between related entities, hypothetically, the fee simple interest could be transferred to the hypothetical buyer.

 

[Pittsburgh Pete]

Technically, MV assumes a hypothetical sale, does it not? Thus, hypothetically, if the hypothetical most probable purchaser is an owner-user and the lease could hypothetically be easily vacated as it is between related entities, hypothetically, the fee simple interest could be transferred to the hypothetical buyer.

Ken, they are apparently only paying attention to your signature line.

Hypothetically I've been doing things wrong for many, many years. But then again I've only been a CG since 1993 when licensing went into affect (with a top ten Cert # in PA). Hard to argue with someone who was licensed six years before it was offered.

 

[Ken B]

In the case of the property described in the OP, I'm betting that the lease is subordinate to the mortgage and that, in the event of foreclosure, it can be voided.

FWIW, I agree with the general principle that a property which is encumbered by a long-term lease between unrelated entities can't be valued in fee simple estate even if the lease is at market terms.

I also understand that there are those who disagree with that general principle.

(The signature line is made with tongue-in-cheek.)

 

[Fee4me]

In the case of the property described in the OP, I'm betting that the lease is subordinate to the mortgage and that, in the event of foreclosure, it can be voided.

FWIW, I agree with the general principle that a property which is encumbered by a long-term lease between unrelated entities can't be valued in fee simple estate even if the lease is at market terms.

I also understand that there are those who disagree with that general principle.

(The signature line is made with tongue-in-cheek.)

I'd like to know what their basis for disagreeing with that principle is, aside from "I've been doing this for 30 years, and this is how you do it." or "one has never questioned it," etc.

Furthermore, I'm not sure how they could find fault in using a hypothetical condition to specify that the subject is appraised as if unencumbered by a lease when only a value for a fee simple interest is requested for a leased property.

In instances where it has been determined the lease could/would likely be absolved if the property were to sell, I've proposed using an extraordinary assumption stating such (we assume it possible but may be not, etc.)

Again, no one has presented an argument proving these two solutions are "wrong." They may say they are unnecessary but I fail to see how it is more appropriate to simply state somewhere in the report (I've seen it tucked away as far along in the report as the discussion of Potential Gross Income) that the binding lease is disregarded because the client and/or intended user requested a value for a fee simple interest.

 

[GregoryK]

It seems we get a lot of similar requests. I think they are realky wanting a "AS Is value in Fee Simple" but just dont realize what they are asking. I would ask the send another engagement letter requesting exactly what they want, then provide them exactly that. Then there will be no confusion. I tend to agree that you have done what was asked and required. As far as to what interest the bank would have in foreclosure, that would depend on the terms of the mortgage and the lease terms. But personally, I would ask a revised letter of engagement, then explain the difference in the report so the reader would understand which interest was value and why it was done that way i.e. "The property is currently subject to a long term lease that appears to relfect current market rents and terms. However at the request of the client, the appraiser has appraised the property assuming the property is held in Fee Simple title" or something to that effect. Then reference the engagement letter, and put a copy in the addendum of the report.

Not sure if I answered your question, but this is how I have been handling these requests.

 

[Fee4me]

It seems we get a lot of similar requests. I think they are realky wanting a "AS Is value in Fee Simple" but just dont realize what they are asking. I would ask the send another engagement letter requesting exactly what they want, then provide them exactly that. Then there will be no confusion. I tend to agree that you have done what was asked and required. As far as to what interest the bank would have in foreclosure, that would depend on the terms of the mortgage and the lease terms. But personally, I would ask a revised letter of engagement, then explain the difference in the report so the reader would understand which interest was value and why it was done that way i.e. "The property is currently subject to a long term lease that appears to relfect current market rents and terms. However at the request of the client, the appraiser has appraised the property assuming the property is held in Fee Simple title" or something to that effect. Then reference the engagement letter, and put a copy in the addendum of the report.

Not sure if I answered your question, but this is how I have been handling these requests.

Is this not a Hypothetical Condition? You would be assuming, for the purpose of the appraisal, a condition (it does not always have to be physical) contrary to what exists. I agree with this, yet I would argue that it is probably better to state it as a Hypothetical Condition - since that's what it is.

 

[25yrcertifiedgeneral]

I was hired as an appraiser, not a lawyer. Generally speaking, it is not my job to determine if what appears to be a valid lease could be voided upon foreclosure. However, to ignore it and state that I have appraised the fee simple rights, in my opinion, would mislead the reader of the report. I am sticking to my guns that the rights appraised are leased fee, and if the client insists that I give a fee simple value, I will state that it is hypothetical and also place it as a stipulation under hypothetical conditions

 

[Pittsburgh Pete]

How does your stance impact USPAP SR 1-4(d)?

 

[Fee4me]

If he appraises the leased fee interest - he has concluded the terms and conditions to be at market, thus the value of the leased fee interest is theoretically equivalent to the value of the property if held in fee simple.

If he appraises a fee simple interest under a hypothetical condition then the rule is not applicable as he is appraising a fee simple interest.