Condominium Ownership

[Brad Ellis]

Mike,

I thought the leased fee interest was that of the tenant on a long term lease. So, if you are appraising the Landlords interest in a leased property, all RENTED or leased properties should have the leased fee box checked. Is that right? In all my 900 years I have never done it that way and no one has objected yet. Live and learn. The next rented property I do I will check the leased fee box (and give the underwriter a heart attack). What if it is a 2 unit property, one of which is owner occupied? Half fee simple and half leased fee?

Leased fee is the owner's portion not the tenant's. The tenant has a leasehold interest.

Brad

 

[Carnivore]

Condos are fee simple ownership. You just don't own the land on which it sits and only a portion of the adjoining walls.

Too generalized a statement. Condo ownership is expressed in many ways. Yes, you own the defined space in fee simple and typically from my experience(only in NC) the condo fee simple owner would also have an undivided proportioned interest in the underlying land. They commonly express this as a percentage of the total area of the development.

Additionally, some condo owners and projects have leasehold rights that may or may not be on site. This is very important to know of in any condo appraisal assignment. Common example in my area is a boat slip!

Not picking on you, just pointing out how much more involved a condo 1073 assignment can be then a standard 1004 cookie cutter.

 

[Ken B]

We are going to take this road again, heh?

With regard to the 1004 form and its like:

You can check the "fee simple" box, which, if you are valuing a leased property, means you are valuing the property at market rent. FNMA and that bunch do not want to lend on the "leased fee" interest as that would mean you are valuing the property at contract rent.

You check the "leasehold" box when you are valuing improvements owned by the borrower, but located on leased land, such as community trust land or tribal land. In that situation, the owner of the improvements have a leasehold interest in the land.

And that's as far down the road I want to go this time.

 

[Richard Carlsen]

Fee simple simply means that the ownership interest is inheritable. Ownership (whatever it is) passes from the owner to the heirs through the estate. This does not happen in a leasehold interest.

Condominium is a form of ownership that is fee simple. The ownership interest, be it air space or interest in the common elements, etc. pass through the estate to the heirs.

Too many appraisers confuse the form of ownership with the ownership interest. They tend to judge all forms of ownership with ownership of a single family detached dwelling as the norm against which all properties are judged for fee simple ownership.

The simplest way to judge if an ownership interest is fee simple is to ask the question: If the current owner dies, does the ownership interest remain in his/her estate and pass on to the heirs? If the answer is yes, then it's fee simple. If not, then it is something else.

 

[Mike Boyd]

Mike,



Leased fee is the owner's portion not the tenant's. The tenant has a leasehold interest.

Brad

Thanks, Brad. So when appraising rented property you are really appraising the leased fee interest of the owner? Guess I will have to break out the old text books.

 

[Michael Chu]

Is there anything inaccurate with the following language:

"the fee simple interest in the condominium unit"

-or-

"the leased fee interest in the condominium unit"

If these are not correct, what is the proper phraseology?

We can safely say, there is nothing "inaccurate" with the phraseology.
But the statement(s) could be inaccurate depending on the SOW.

.

 

[moh malekpour]

The only time you need to check the leasehold box is when the land beneath the property is a leased land. This kind of leaseehold ownership is not limited to condos, it can be single family, small units, apartments or commercial properties.
I have appraisers condos and single families which were built on leaselands.
In the condo case, the owner of each unit pays the HOA fees and a separate land lease fee which appraiser should document and disclose it in the report.

 

[Terrel L. Shields]

"the fee simple interest in the condominium unit"

If I told you that you are all wrong, what would you say?

You do not have fee simple interest in reality although some define it as such - even title companies. Fee simple is an estate without limitation and includes the air rights, surface rights and mineral rights. You have a fee interest but not fee SIMPLE. SIMPLE means the whole bag of marbles.

In a condo you have a fractional ownership of a fee title in air rights space unit defined in 3 dimensions (unless it is one story, aka townhouse) and you have an undivided interest in the common areas.

The fact some title companies may refer to it as "fee simple" aside, the truest definition of "Fee Simple" is

•Fee Simple title to property includes all the rights, air, surface, water, hunting, and minerals. Anything less than all the rights is something else. "Fee in surface" "Fee in minerals" "Fee title" whatever...but not fee simple.

The URAR makes you a liar.

 

[Brad Ellis]

Mike,

Thanks, Brad. So when appraising rented property you are really appraising the leased fee interest of the owner? Guess I will have to break out the old text books.

I wish it were that cut and dried.

I think (and our commercial folks should feel free to make their comments) that the theory would hold that any time a property is under lease that there are at least 2 estates- that of the owner and that of the renter (if no others). Of course, if a property is rented out, then the tenant has some rights and those then diminish the rights of the owner; hence the dual estates.

But, in practical terms no one that I know of has actually ever delineated just what the term of said lease must be.

Since most residential leases are for 1-2 years, does that then really diminish, in a truly measurable way, the owner's rights. Technically, yes. But we can all drive ourselves nuts trying to do that. So I had asked that question- 20 years ago- to my income property instructor- Prof. Jeff Fisher, MAI of Indiana U. He said that, in practical terms, unless the lease is long enough it is pretty foolish to try to split out values for those 2 estates and suggested a term of 3 years might be a good line of demarcation.

But remember, that is/was his opinion. Nothing cast in stone here.

Further, the theory could be said to go deeper in that if one adds the values of the two estates (owner's leased fee and tenants leasehold) you end up with fee simple. Unfortunately that may also not always be true. Even USPAP tells us not to add together two partial estates to get the value of the whole, so I guess that also applies to the types of estates.

As to the values, the leasehold must be below market for there to be a measureable value to it (apart from the intrinsic part of just being able to use the property). So, the value of the leasehold can be derived by capitalizing the rent differential.

I am guessing the complications are why we generally approach this from the fee simple perspective. 1-2 years on a lease may be said to be immaterial to fee simple (not stating- just musing). But if the lease is long enough to truly impact the ownership rights then I gues it ought to be approached from the two estate viewpoint.

And now Moh notes that many Native American tribes have land holdings rented out to condo projects so those are leaseholds anyway (true). So you could begin with fee simple and then have it impacted by two other estates- the leashold of the tenant and the leased fee of the land owner along with the estate of the condo owner (leased fee).

And in Hawaii, there are many buildings in which some of the condos are owned in fee simple and some others in which they still lease their "portion" of the land! I know that flies in the face of logic but I assure you they exist and are really quite common there. Then toss in the rental income many get from renting out their units short term- week, month, season- and you get a condotel!

So, the way I'd approach all this is to find out how long the lease is, If typical residential (2 years or less) I'd just go with fee simple and disclose thye lease situation and let the client decide. If the clinet wants you to get deeper into it, then I see one solution- higher fee!:

Brad

 

[moh malekpour]

Brad,

But, in practical terms no one that I know of has actually ever delineated just what the term of said lease must be.

In a practical terms, the term of said lease must be very specific and in writing because the lease is a written contract by which an owner of an asset like a home, a condo or an apartment grants a tenant the right to the exclusive possession and use of that asset for a specified time and under specific conditions for specific periodic rents. A long-term written lease creates a leasehold interest, which can be mortgaged or traded. A short term written lease, although, with the same leasehold interest and right is not practically tradable or mortgageable because the lessee’s rights and interest is going revert back to the lessor in a short period of time.