Debate On Fee Simple Vs. Leased Fee

[Bill_FL]

OK, continuing the devils advocate role.

The leased fee estate is created when the bundle of rights (fee simple) is divided. By selling leased fee, I have not sold my entire bundle of rights. Would I not sell my fee simple interest, subject to existing leases.


If, say Paul wanted to buy my right to collect the contract rent, however I remain the "owner" of the property. Would that not be selling the leased fee estate?

What I am trying to get at here is this, when a comparable sale is listed, and the line item for Property Rights Conveyed is filled out. I see them filled out both ways when reviewing.

 

[Serge Paquette]

If you sell only the right to collect rents on certain active leases and nothing else, you are not selling the leased fee interest, but rather something less than the leased fee estate. The lease fee estate is the fee simple estate, subject to the leases. With the leased fee estate you don't only get the contract rent, but the right to use or lease out vacant space, the right to reversion and all the other rights, but subject to the existing leases.

 

[Bill_FL]

Just as an interesting side to this, I just pulled up the deeds that transferred the property on 3 shopping center sales I know of. All of those deeds tranfered the fee simple interest to the buyer.

 

[Paul Ness MAI]

Bill, what do you mean the deeds transfered the fee simple interest? Did it actually state that on the deeds? If so, there's a law suit waiting to happen.

 

[Paul Ness MAI]

I think Serge has done a nice job of explaining the reality of this argument. Here’s another of my 2 cents…Once the “bundle” of rights is split up, the fee simple estate no longer exists. As a means of explanation, Serge uses the term “fee simple subject to…” which is ok but in truth every property is “subject to” something. Example – a farm is sold with a conservation easement. It is not the entire bundle of rights, but could be described as the “fee simple interest subject to a conservation easement.” But when it comes to the leased fee interest, why not call it that instead of “fee simple interest subject to existing leases”? And Bill, Serge is right, if the owner of a property’s leased fee interest sells his rights to receive rent from a lease by an assignment, he is not transferring the total leased fee interest. He then owns the “leased fee interest subject to an assignment of lease”…..this is getting ridiculous!!! What can I say, it's a slow Friday afternoon before a three day weekend!

 

[Patrick Egger]

Just my two cents ... leased fee and fee simple are estates and property rights. What transferred is the fee simple ownership, subject to the leases (and any other emcumberances) of record. When you take title to anything in fee simple its always subject to certain easements, zoning etc. along with any recorded or unrecorded rights.

In this case, the title would transfer as fee simple since the leases are generally not recorded and hence not of record. Don't be misled by what the title company does (as the leases are not recorded) vrs what estate actually exists as there are leases.

There is often a difference in the recorded title vrs the actual property rights.

 

[Bill_FL]

Paul,

Yes, the deed says the seller is transfering to the buyer "the fee simple interest to use and enjoy".

If your local clerk of the court has a web site, pull a few up and look at them. That is partly how this debate got started. We all know when the lease is made, it creates the leased fee and the leasehold estates. However, when title transfers, what has been transferred? The deeds say fee simple, subject to leases. The appraiser says in the appraisal report, leased fee.

So is the attorney wrong? Is the appraiser wrong? Or are both right, and its just a matter of semantics?

Personally, I see it this way. The attorney is correct, the fee simple interest was transferred, subejct to encumbrances. The appraiser, is describing the estate purchased by the buyer, the leased fee estate, to the reader of the appraisal. Either could be correctly used in the appraisal, with adequate narrative explanations.

To bad we do not have a resident attorney on the board here.

 

[Fred]

Apologize in advance for the length.
I don’t think this is a moot discussion and I see Bill’s points as salient. I think everyone has made some bona fide points.

This issue is a hot one for me as I am in regular disputes because two appraisals are not based on the same premise of who owns what and for how long. A lot of property in my area is in some form of divided ownership. Right now, I am considering whether to go to battle against a land appraisal, where there are 30 years remaining on a 50-year lease – and the appraiser used direct sales comparison to find the market value of the “fee simple encumbered by the leases in place.” Well, the appraised interest in not the encumbered interest, but it should have been. The capitalized land rent, which is VERY secure should come to 50% to 100% more than the appraiser’s fee simple absolute value of the land by sales comparison, even before you start to look at the 30-year reversion.

One of the recurring problems I see in explaining and understanding things is the way appraisal literature casts things in an ‘either-or’ light, when in fact the relationship is set-and-subset. ‘Either-or’ is simpler to understand, but usually inaccurate.

When I took property law, it was fee simple absolute and fee simple conditional – the latter being a group of subsets of the former. One of the problems with using ‘slang’ like fee simple and leased fee is that it distorts the fact that both estates are "fee simple," but one is fee simple absolute (FSA) and the other fee simple is not absolute because it is subject to conditions (lease encumbrances). It is not either fee simple or something else. There is always an underlying fee ownership (and let’s not get into timeshare projects, yet).

Paul, I would like to hear more about the reason why there would be lawsuits with deeds identifying fee simple. I too have seen shopping centers, hotels and other investment property sold on deeds that say fee simple absolute – between corporations with armies of lawyers and even where law firms were parties to the sale and signatories to the deed. The buyer is obtaining the FSA, just that the absoluteness is conditional on leases and easements. If the deed said that the buyer was only paying for the “leased fee” (depending on how you want to define that), why wouldn’t the space revert to the seller when the lease expires.

Once the “bundle” of rights is split up, the fee simple estate no longer exists.

While I agree with most of your analysis, Paul, and enjoy your excellent command of language, I would not put it this way - assuming fee simple estate means fee simple absolute. By way of crude analogy, if a building is painted white and you paint over that with a coat of green, the white coat does not “cease to exist.” Eventually, the green wears off and the white is revealed again. So to with a fully-leased property, eventually the encumbrance wears off and the underlying coat of fee simple absolute is revealed again. No matter how many times you exercise the option to put another coat of green on there, the white paint is still underneath. Leased interests do not replace fee simple absolute. They more just lay over it and obfuscate it.

The one that winds my cork is this.

Use of market rent reflects fee simple interest.

Here’s what I mean. A guy has “identical” buildings to sell. Building 1 is fully rented at exactly market rent for a long term to a perfect tenant. The market and building NOI are exactly $100k, the market (leased fee) cap rate for these properties is 10% and the value is thus, $1M. Building 2 has just become vacant. Based on the principle of substitution, what “prudent” investor who is willing to pay the same price for the secure and stabilized 100k income stream of building 1 and the more speculative prospect empty building 2 and its delayed benefits. So, I keep wondering if the other shoe has to drop, but the idea that the "fee simple" value of building 2 is market rent capitalized doesn't seem to work.

 

[Serge Paquette]

Steve,

On your last point, it sure doesn't tell the whole story. Ignores occupancy issues and most probable buyer issues. Some buyers care if the property has good occupancy and a good rent roll, while buyers which want to buy for owner occupancy don't care too much about it, in fact, they'd rather have the building vacant so they can go ahead and occupy it. Who is the most probable buyer is so important and neglected in appraisal education.

 

[Fred]

in fact, they'd rather have the building vacant so they can go ahead and occupy it

Aha! That is EXACTLY what I was getting at. Take it a step further. Say the government or private developer put in some major project that changes the make up of a district. Say the government moves the location of the courthouse. Now the law firms start moving in buying properties to create offices near the courthouse. They don't want to be tenants and they compete for a fixed supply of space. Let's say good space in need of basic conversion and remodeling is going for around $150/nrsf (for fee simple absolute), BUT market rent capitalized is only $100/nrsf because 1) the lawyers don't want to be tenants and 2) they have enough capital and credit that speculators and developers can't beat them to the space and renovate fast enough.

That is why I have always questioned this homily that fee simple (absolute) is market rent capitalized. The user (fee simple absolute buyer) is not bound by market rent capitalized prices the way an investor (leased fee buyer) is.