Does fee simple mean vacant or occupied/stabilized?

[Ken B]

Fee Simple as opposed to leased fee represent the interest in real estate being appraised, NOT the occupancy status. Besides, the vacancy and collection loss allowance utilized in valuation is based on economic vacancy not physical vacancy.

Based on your description of the conversations, the underwriter does not appear to have a grasp on appraisal methodology or even investor behavior

I'm thinking the underwriter is getting hung up on those definitions, erroneously thinking that "fee simple" valuation can only be applied to a property unencumbered by a lease. Yet, this misunderstanding would seem to indicate an underwriter grossly unqualified to perform their job. Don't they teach on Day 1 of Income Cap Theory that, as it pertains to valuation of a leased property, fee simple analysis pertains to valuation at market rents and leased fee analysis pertains to valuation at contract rents? It's been awhile, but this is so basic that any demand to "prove in writing" the concept would result in a call to that person's supervisor so that the adults could have a mature conversation.

 

[Eli]

Maybe they were just wanting you to consider a market indicated vacancy and rent (collection) loss in the income approach. I think that is kinda where Howard was going, but I may be off base.

 

[Eli]

But then all your income/expenses would be market based or supported on fee simple, which may or may not equal actual income/expenses as Ken stated.

 

[Eli]

I don't get the vacant part. single or multi tenant makes a difference on the reasoning I guess. But you will have to use some kind of hypothetical to do it vacant because it is occupied.

 

[PL1957]

I know a couple of clients who take "as is" for owner occupied properties to mean "vacant and available". I've always argued that, for properties whose typical purchaser would be an owner user, deduction for lease-up would not be required. However, if the typical purchaser would be an investor, a lease up deduction would be warranted.

 

[Timbo813]

Not to beat a dead horse (maybe it's too late, lol). But I think the UW was focused on the one totally vacant sale I used in the market approach. She said that sale was my best one since it reflected pure fee-simple value, since it was not encumbered by a lease. In my grid, I made an upward adjustment to that sale for occupancy. But she said I should have done the opposite, make downward adjustments to the occupied sales, since the vacant one reflected a pure fee-simple transaction (no lease). I explained that the vacant sale might reflect pure fee-simple value, but it was also somewhat distressed since it was totally vacant at time of sale.

So I think you can see how she is confusing stabilization/occupancy with fee simple/leased fee.

 

[Terrel L. Shields]

Fee Simple as opposed to leased fee represent the interest in real estate being appraised, NOT the occupancy status. Besides, the vacancy and collection loss allowance utilized in valuation is based on economic vacancy not physical vacancy.

The UW is not understanding that fee simple relates to the ownership, not the occupancy. Fee simple is exactly that. Ownership from the skies above to the center of the earth. Cuius est solum, eius est usque ad coelum et ad inferos - from heaven to hell.
The leased fee value would relate to the occupancy

Based on your description of the conversations, the underwriter does not appear to have a grasp on appraisal methodology or even investor behavior

What Howard said...agree.

 

[Eli]

The only time I had to do something similar to what the underwriter was asking was with a proposed Steak N Shake. The typical cost on a Steak N Shake is more than the typical fast food facility. They wanted it done like Ken said "as if dark".

Which meant, I had to find sales of fast food or restaurant establishments that changed franchise (or name or use) after they transferred because the underwriter was wanting to eliminate any business value from the transfer. Wow, I have a strong feeling it killed that deal on the Steak N Shake, but maybe not. That was early in my career. I don't think I have taken a restaurant assignment since.

 

[Michael S]

The only time I had to do something similar to what the underwriter was asking was with a proposed Steak N Shake. The typical cost on a Steak N Shake is more than the typical fast food facility. They wanted it done like Ken said "as if dark".

Which meant, I had to find sales of fast food or restaurant establishments that changed franchise (or name or use) after they transferred because the underwriter was wanting to eliminate any business value from the transfer. Wow, I have a strong feeling it killed that deal on the Steak N Shake, but maybe not. That was early in my career. I don't think I have taken a restaurant assignment since.

Pretty typical. The fee simple "go dark" value of a brand new single tenant net leased facility can easily be half or less the leased fee value. If Dollar General is willing to pay $14/SF for a new 8,000 retail building in a rural community, how much would some mom and pop retailer pay if they decided to never occupy the building? Half that? Even if you give them the benefit of the doubt and say they'll pay $10/SF you're looking at a big difference in cap rates. A national credit tenant like Dollar General might sell at a 7% cap rate ($14/SF / .07 = $200/SF) mom and pop retailer might sell to an investor at a 10% cap rate ($10/SF / .10 = $100/SF).

 

[Mark K]

FWIW, I agree with her. Whether or not she understands what she really needs or wants is another issue.

"Fee Simple: Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat."

As I read (and have always interpreted it) this includes no lease interests or leasehold estates.

What property rights did you appraise and what definition did you use in the report?