Does fee simple mean vacant or occupied/stabilized?

[Eli]

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).

Yep. the level of risk can really impact those cap rates. I am happy for the OP he is not dealing with something really unreasonable.

 

[Eli]

How many tenants in the subject and the vacant sales comp? Was the vacant sale purchased for similar tenancy to the subject's existing tenancy mix? These are a couple of thoughts that come to mind. Lease up costs and time to stabilization are a factor that would vary depending on different factors of the vacant sale. You don't have to answer, but these are questions that come to my mind outside looking in, which isn't a very true or reliable view from where I am. LOL

 

[Eminent Domain]

The industry has used the term 'Fee Simple' interchangeably with 'Leased Fee Stabilized' for years. However, technically there is a difference and it is most notable from a legal perspective. Sounds like the underwriter needs to be specific with the context of how it is used and just what the scope of work is for the assignment.

The Appraisal Institute class 'Advanced Concepts & Case Studies' delves into this quite a bit.

 

[Ken B]

I didn't to express it previously, but I suspect the underwriter has a residential background and is not familiar with commercial valuation methodology.

 

[NachoPerito]

I assume i a fee simple analysis of an owner/user property that it is occupied at market rent (if a sale occurred picture a sale leaseback) unless the client specifically asks to treat the property as if vacant. I know of at least one client, Wells Fargo, who specifically asks for us to treat an owner/user property as if vacant. I think this may result in less than the 'as is' value, but we are able to accommodate their request.

 

[SpartanAG]

OP: Out of curiosity, did you ask the underwriter to support her view that fee simple should always be valued as vacant? I would be interested to see her answer.

 

[NachoPerito]

I don't think the bank is concerned about market value as much as protecting their balance sheets. I see this as more of a bank policy to protect themselves when a property goes dark, but I could see it preventing some deals from getting done due to LTV issues, which can't make the loan officers happy.

 

[Greenra]

As others have noted, it is vital to define the property rights being appraised. Occupancy has nothing to do with property rights, but a property encumbered by a rental agreement or lease divides property rights as does easements, deed restrictions, etc.

Many appraisers simply indicate the property rights being appraised are fee simple, lease fee, leasehold, but fail to fully define the rights being apprised.
This can be misleading especially given the fact that most appraisers incorrectly identify fee simple property rights, but fail disclose that mineral rights have been severed and there are encumbrances affecting the property. Some appraisers indicate surface rights or fee simple rights subject to noted encumbrances.

The point being, you should define the rights not simply refer to a term. Hence, you would be correct to define the property you are appraising as either fee simple or leased fee as long as you define what you mean. We all know that the concluded value should be the same if rental terms and rents reflect market rents and terms. Typically, a simple sentence or two clarifying rights is all that is needed.

 

[Roy Courtney]

I had an underwriter call me one time to tell me that I had missed rotten fascia board INSIDE the house! She was a highly trained FHA Direct Endorsement GURU! What rock do they find these people under?

I asked her if she had seen this? No the Realtard told her about it!