Income Approach?

[J Grant]

Its pretty simple. Bank orders a fee simple appraisal that has a tenent in it with a lease.

Appraiser

“ the hypothetical fee simple value is $500k” a hypothetical condition was used as fee simple rights are contrary to what currently exist. This HC was used as a matter of fact”

The as is rights are leased fee. The leased fee as-is value is $500k.

The whole point is, you need to tell someone when you appraised something that is contrary to what exists.

I have done lots of small income property appraisals and have never had to make a HC. Because the fee simple still exists, alongside the leased fee or leased fee potential ( leased fee if rented, potential if property is vacant)

There is a sales comparison approach indicator, an income approach indicator and a cost approach indicator of value. An appraisers can develop just one of those, two of those or all three and reconcile them for the market value opinion.

If a specialized assignment or other value definition or specific commercial assignment needs an HC I can't comment on that.

 

[Addie]

I have done lots of small income property appraisals and have never had to make a HC.

I don’t doubt this. Every appraiser does it this way. Still doesn’t mean it’s contrary to what exists. No 1 person holds fee simple rights when a lease is involved. You valued the fee simple rights, yet not 1 person actually held those rights. Apitome of a HC.

(You have said fee simple ownership, make sure you say rights)

 

[J Grant]

Like one of those posters said. It exists, just no one currently holds it.

The owner of the property still "holds"/aka owns the fee simple interest by fact that they hold title and deed to the property. It is not erased because the owner decided to add a leased fee component , aka lease the property for a year. The owner still owns the property for that year, just that they willingly gave up right to occupy it /some other rights in order to receive rental income for that time period.

Should the owner choose the sell the property during the time it is leased with a tenant in place, the value of the fee simple on sale in the sales comparison approach might be affected positively or negatively by the presence of the lease/tenant in place.The appraiser can choose to only develop an income approach and/or only value the leased fee interest, but that still does not "erase" the fee simple ownership of the property title /deed

 

[Addie]

fee simple ownership

What’s that? Aren’t you appraising rights?

 

[J Grant]

I don’t doubt this. Every appraiser does it this way. Still doesn’t mean it’s contrary to what exists. No 1 person holds fee simple rights when a lease is involved. You valued the fee simple rights, yet not 1 person actually held those rights. Apitome of a HC.

(You have said fee simple ownership, make sure you say rights)

Fee simple ownership conveys certain rights. One of the rights is right to occupy. If an owner decides to rent the right to occupy to a tenant in exchange for $ for period of lease, that option is also one of the rights of fee simple ownership ( right to rent or lease a property out)

 

[J Grant]

What’s that? Aren’t you appraising rights?

Fee simple ownership is a bundle of rights. You don't know what fee simple is? Look it up..

Re back to the HC Leased Fee bought up..perhaps he means when we appraise a property as if vacant fee simple at market rent rather than contract rent and do not factor in impact of contract rent/tenant in place ?

 

[Addie]

This is from prior link. Post #5. What would your answer be to these questions?

“Ask and answer these questions regarding the basic premise of the appraisal - a hypothetical sale on the effective date:

There is a lease in effect... what interest is transferred by the owner? Answer: The only interest that the owner can transfer - leased fee

Now, assume there is no lease in effect (a condition contrary to what exists), what interest is transferred by the owner? Answer: fee simple

Therefore, in order to appraiser the fee simple interest you must 1st allow it to exist (un-fractionalized). Using a hypothetical condition accomplishes this.”

 

[J Grant]

This is from prior link. Post #5. What would your answer be to these questions?
“Ask and answer these questions regarding the basic premise of the appraisal - a hypothetical sale on the effective date:

There is a lease in effect... what interest is transferred by the owner? Answer: The only interest that the owner can transfer - leased fee

?? What law is that from? What law prohibits an owner from selling their own property ( the owner's fee simple title/deed bundle of rights ) just because there is a tenant leasing it ? The new owner would buy the property as fee simple ownership, along with the leased fee interest ( the tenant in place and lease) - unless they make other arrangements there are always exceptions)

Now, assume there is no lease in effect (a condition contrary to what exists), what interest is transferred by the owner? Answer: fee simple

The sale is still fee simple, only with no lease in place. In the above when a property sells with a lease and tenant in place, that leased fee interest can impact the value ( sale price ) of the fee simple .

Therefore, in order to appraiser the fee simple interest you must 1st allow it to exist (un-fractionalized). Using a hypothetical condition accomplishes this.”

An appraisal can be made with or without a HC

 

[Terrel L. Shields]

Apitome of a HC.

Contrary to what is spelled, too. But the fee simple value is a separate issue from the fact one of the bundle of rights is exercised

S - sell
L - LEASE
U - use
G - give away
E - enter/Exit
R - refuse to do anything

And some argue that the bundle of rights allows one to also Mortgage a property.

If you are valuing the fee simple, it is what it is, regardless if leased or not. If you are valuing the leased fee, then it can be something else, and if you are valuing the leasehold it can be something else. So if you are leasing at MARKET RATES the fee simple is the same as the leased fee. The fee simple has exercised their right to Lease...

 

[Deleted member 152047]

I agree with you there Addie and I think your methodology is flawed J Grant. You have to use a hypothetical condition when developing an opinion of value for something that is contrary to what exists. If the property is leased and the client asks for the value of the fee simple estate, you need to make a hypothetical condition. However, if the property is leased at market rents you could indicate that the value of the fee simple estate and leased fee interest are the same (you would provide two values). You would also still need a hypothetical condition for the value of the fee simple regardless.

Where I have disagreed with you Addie is that you have thrown around terms like "value of the fee simple leasehold," that does not exist. You have three interests in a given property:
1. Fee Simple Estate- full bundle of rights
2. Leased Fee Interest- fee simple estate that is encumbered by a lease
3. Leasehold Interest- the tenant's interest in a property (I am not going to get into sub-leasehold interests and sandwich leaseholds as they all fall under this category)

Leased Fee (Value) + Leasehold (Value) = Fee Simple (Value)

You can have partial interests as well, but I am not going to get into that.

Going back to the original question. The OP asked if they should develop an income approach? Well, probably, but the most reliable indication is likely the SCA. However, the comparables will need to be adjusted downward for their superior property rights (as the comparable buyers were entitled to ownership of the full bundle of rights, i.e. the Fee Simple Estate). How do you arrive at this adjustment? Well, that is the tough part, there will likely be a positive leasehold value as the value of the leased fee interest will be less than the value of the fee simple estate in this instance (according to subsequent posts). One could look at what a buyout of the lease might cost. The adjustment is likely somewhere in that neighborhood. As a tenant, if someone came to you and said, hey Mr. Tenant, I would like to give you $20,000 to buy you out of the remaining term of your lease, most would be all over that.