Debate On Fee Simple Vs. Leased Fee

[Bill_FL]

Steven,

Thanks for joining this thread. I was begining to feel like I was the only person who ever questioned this.

It is just a topic that several of us (offline) have debated. I wanted the opinions of more of you all, so I thought I would post the question here. We have all read the same books, and know what they say. However, I like to challenge those writers when I think that something could be better. I think this is a case where because it was written in black and white sometime ago, it must be right. But, the people charged with knowing the law, the attornies, do it a different way. One of us has to be wrong.

 

[Fred]

We have all read the same books

Bill, I am not so sure about that.

There is a vein of literature and a chain of authors that reflect the way I (maybe we?) think of it. For example, you should check out "Appraisal Principles and Procedures" by Henry Babcock. This was the ASA text for decades. This school of thought, that goes back in the leading literature at least to the 1920's. It separates property types and the need for valuation approaches more sensibly (in my view). Instead of say, commerial versus residential, this system categorizes properties in three broad categories. (and this is real brief summary)
1. Investment properties that trade for cash flow and that would be appraised by capitalization.
2. Owner-user properties that are readily marketable, but not usually traded on income, that would be appraised more like "direct sales comparison"
3. Service properties that are often public buildings like libraries or museums, and that would often be appraised by replacement cost, because the institution that owns them cannot just go out and buy a substitute train station. So the answer to the question of worth, is often value-to-the-owner or replacement cost. However, that does not mean that there won't be times when you will need to go after exchange value on these babies.

Of course there is overlap. And as Serge's last post says, the hunt for the "most probable buyer" and whether that is an investor or user is the key to which method of valuation is the best practice. I intended no slur toward any organization because I think they all have contributed mightily to what we all know. However, as Serge said, he finds what I just mentioned to be a missing link in education. But not in the ASA system.

In that system, one of the first questions in definint the scope of work would entail deciding most probable use category and thus most probable buyer and whether the property goes more in category 1 (akin to leased fee) or category 2 (akin to fee simple).

 

[Paul Ness MAI]

A lot of points to cover quickly...First, if the deed read only "fee simple" I believe that would be a mistake, but Bill clarified and said the deed stated "fee simple subject to existing leases" which is essentially the leased fee interest. Second, Steve, with regard to my statement that the fee simple interest doesn't exist, I visualize ownership interests as being very dynamic and ephemeral. Using your example of a painted house.... If a buyer buys a green house it is green when he bought it, but could become white again in the future if the green paint wears off. You don't say the guy bought a "white house that was painted green" you say he bought a "green house". Same with the interests transferred. A guy buys an encumbered property and he is buying the leased fee interest (or fee simple subject to existing leases if you prefer) that may become fee simple in the future. Do we need to look up the dictionary definitions? Fee Simple - "absolute ownership unencumbered by any other interest or estate subject only to the four powers of government." Leased Fee - "An ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; the rights of lessor or the leased fee owner and leased fee interest are spcified by contract terms contained within the lease." (Source: Dictionary of Real Estate Appraisal). As a side note, the contract also states specifically or implicitly that occupancy reverts back to the landlord at the termination of the lease. At that point the leased fee interest no longer exists and there again is a fee simple interest. AGAIN - this is all not to say that an appraiser can't appraise either the leased fee interest (considering the encumbrances) or the fee simple interest (without the encumbrances) but if there are substantial leases in place what a buyer is buying is the leased fee estate. I think we're just beating something here that is a semantic issue.

 

[Bill_FL]

Paul,

The deeds all read, "transfers the fee simple interest to use and enjoy."

Later, in the deed, are the standard, subject to taxes, encumbrances, etc.

 

[Paul Ness MAI]

What can I say? I'm not an attorney. I guess they have their reasons for stating things the way they do. What you just posted could simply be their standard verbiage used in most cases as a "one size fits most" deed. After years of experience, they may have determined this is the best way to cover their butts in most cases. Have you asked a real estate attorney about it?

 

[Bill_FL]

Paul,

No I have not. Not yet anyway.

I think what I said in an earlier post probably fits. Technically, under the law, the attornies are correct. However, when we describe it in an appraisal, we are attempting to communicate to the reader, the estate held by the owner at the time of sale.

For that reason, I think I will look into changing the wording on my grids from "Property Rights transferred" to something else. Not sure what that will be yet, but will work on something.

 

[Fred]

Paul post,

You don't say the guy bought a "white house that was painted green" you say he bought a "green house".

That would depend on whether it's OK to be colloquial or I need to be legally precise. Technically, the paint is green, but the house is not. If an appraiser puts on a green coat, only the coat is green. I should actually change the analogy so that the house is a material of permanent color painted over in another color.

Do we need to look up the dictionary definitions?

That depends. You did not look those terms up in “the” dictionary. You looked them up in “a” dictionary. My first choice for legal terms is Black’s, where the phrase “leased fee” does not appear; so you can’t look it up at all there. That is why I refered to "leased fee" as appraiser “slang.” My second reference is property law texts and my third reference would be appraisal books.

Maybe it is not semantics. The difference between saying “green house” and “a house painted green” is that the latter openly recognizes that the green is not 100% of the house. Green house and leased fee seem to fail in making that distinction. Look at your quote:

Leased Fee - "An ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others

Shouldn’t that say ‘some or all of the right to use and occupancy transferred – or does leased fee refer only to properties where the fee is 100% leased. Under the quoted definition’s exact (or is that, inexact) wording, is Bill’s original 97% leased shopping center in leased fee? Doesn’t the owner have access to the common areas? Access and use of the parking lot? Access and use of the un-rented 3%? Access and use of the space set aside for management facilities? Perhaps even access to conduct structural repairs?

 

[Paul Ness MAI]

Fine Steve, I hope some of your last post was tongue-in-cheek, otherwise you need to get a life! I think your last post supports my point on the semantics underlying this debate, which has gone far beyond where it needs to go and much farther than my level of interest.

 

[Fred]

Paul,
The last time this topic came up, you started talking about my life then, too, which is both beyond where professional discourse needs to go and not so coincidentally beyond the rule boundaries of the forum.

 

[Bill_FL]

I really did not mean for this to turn into a personal slug fest. I simply noted that certain trade orginizations publish one theory, while lawyers do something else. Just wondered who was right.