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Another Fee Simple vs. Leasehold Question

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Nancy in Friday Harbor

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Jan 16, 2002
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Certified Residential Appraiser
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Washington
I am doing an appraisal for an estate, dod Jan/02 (no this isn't the same one as Oregon Doug's).
It's a waterfront lot with a WWII quonset hut on a concrete foundation made into a small house. Typical late '40's finish/quality. Needs paint, but appears in OK condition. OK so far.
The challenge? The decedant made a lease agreement with the tenant, which the heir (who is well into his 80's) stated to the tenant in my presence that he intends to honor. The lease agreement was that the tenant could stay there as long as he wanted at the same rent ($450/Month). Bob, the tenant, is in his early 70's, has been there 15-20 years and doesn't want to move. The lease was never written up, but was done with an agreement and a handshake.

So, what was it worth when the owner died? My take on it is to come up with the market value discounted to present cash value by using actuarial tables for the normal life expectancy of the an elderly, white male tenant.

What say you? Any suggestions?

Thanks,
Nancy
 

Terrel L. Shields

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May 2, 2002
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Certified General Appraiser
State
Arkansas
Again, I would ask the client if they want the fee simple estate as is. If the market rents are higher than actual rents, there is a leasehold interest similar to a life estate but paying a monthly fee. I would say you have to forecast the market rents over the life of the leaseholder, discount them over that period and determine the leasehold interest, which is subtracted from the fee simple interest.

But I would bet the client only wants the fee simple value as of the date of death without considered the leasehold interest in which case you are estimating a value with a hypothetical condition that you should state, that is, as if the estate was unemcumbered by a long term lease.

ter
 

Restrain

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Jan 22, 2002
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Certified General Appraiser
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Florida
I would agree with Terrel as to fee simple. However, the problem may well be that the highest and best use would be for redevelopment of the lot. Waterfront - generally very prime. WWII Quonsit hut - generally low value. So, you may have lot value with a return on the lease over the probable lease term.

Roger
 

officepolicy247

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Apr 19, 2002
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Certified General Appraiser
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California
Nancy:

I don't know the statutes in your area, but you may want to check them out. In California, a lease for longer than one year must be in writing to be enforceable.

Sounds like your lease was only "valid" between the parties but not enforceable. The deceased did honor his agreement, but that obligation would have terminated with his demise. If that is the case, you would only need to address the fee simple interest because the only binding tenancy would be reduced to month to month (assuming the tenant pays rent monthly).

If, on the other hand, unwritten leases are binding in the San Juan Islands....your original idea sounds pretty viable. The lease would have no contractual termination date, but a reasonable life span (much like a reasonable holding period in any other investment) can be determined from actuarial tables as you propose. Good job Nancy.

Doug Kues
 

Nancy in Friday Harbor

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Junior Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Washington
Thanks all for your great responses. Lot's to think about.

Am trying to reach the attorney who's handling the estate and get her to make the determination and so instruct me--in writing.

Due to the size and complexity of the estate and the fact that the decedant died without a will and there's only one possible heir -- this thing will surely be audited by the IRS. Want to make sure a I have all my little duckies in a nice, neat, legal row!! :roll:
 
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