Fee Simple v. Leased Fee

[NLCApprMgr]

The same folks who worry over than probably are the same ones that don't even consider the impact of the mineral rights being severed.

I am breathlessly awaiting my first quarry property to see how the appraiser handles. This happened to me and some vacant land I appraised about 10 years ago.

 

[NLCApprMgr]

HUD 4150

This is what I found in the HUD 4150.2 Subsection 4 - The Valuation Process document:

Lease Fee is defined as an ownership interest held by a
landlord with the right of use and occupancy conveyed by
lease to others; usually consists of the right to receive
rent and the right to repossession at the termination of
lease.

Thank you HUD for reiterating the definition from the Dictionary. Like I said, nothing in the definition says how long the lease has to be in order to to qualify; basically, if the owner of the property receives rent, then it's leased fee.

And that is all HUD says about Leased Fee. The guide does not dictate the use or exclusion of any approach regardless of interest.

 

[Ken B]

I seem to remember something about a method of estimating the value of a leasehold interest by deducting the value of the leased fee interest from the value of the fee simple interest.

So it would seem that it must be possible to develop an opinion of value for the fee simple interest in a leased property. If the value of the leasehold represents the remainder after deducting the value of the leased fee interest, which is developed using contract rent, from the value of interest in fee simple estate, I guess we develop the value of the interest in fee simple estate utilizing market rents.

And now to argue the hypothetical nature of an interest in fee simple estate when a property is leased...carry on.

 

[Mike Garrett RAA]

Intent! It's my opinion the intent of that part of the form was to differentiate between ownership of the land rather than a "land lease" such as found in Hawaii and other areas. We have only a few land leases here in my marketing area.

 

[Ken B]

Let's cut to the chase. Residential leases are generally short term - 12 months or less. Thus, it is assumed that, should the lease in place not represent market terms, that it will be a relatively simple process to adjust the rent to market terms upon expiration of the lease. So any overage rent or rent loss realized during the remaining lease term should be negligible. Might an appraiser want to discuss the terms of the lease contract in comparison to market terms? Sure! But that doesn't mean that the fee simple interest in a leased property can't be developed and reported utilizing market lease terms, if that is specified as the scope of work. If the property is leased at market terms, it just so happens that the value of the interest in fee simple estate and the value of the leased fee interest are equivalent and there is no leasehold value.

Since I can't actually recall this particular aspect of an assignment being previously discussed, what is the impact of the Intended User and Intended Use in a mortgage lending assignment involving a leased residential property. Might not the lender already have safeguards in place when lending on a leased property?

 

[Kim Whiting]

The client is supposed to inform us of lots of things. The "client" in my experience is a loan officer trying to make a commission hiding behind the skirts of an AMC. It's only when a report gets to an underwriter that "real" questions are asked and answered. I love this perfect world where we as appraisers are in this cozy, speaking over a glass of wine relationship with our "client". Does this actually happen? Smitty the loan officer is no different than he/she was back in the good old days. They wouldn't know fee simple from the fees charged at starbucks.

 

[hastalavista]

To the OP: I suggest in your engagement agreement, you state what interest you want appraised: fee simple, or if leased, then the leased fee interest. That will solve your current problem.

I would suggest, however, that it will create new problems... as there are likely many residential mortgage appraisers who have never had to tackle valuing a leased fee interest (although it is usually as easy as Ken B. describes).

As Peter has already mentioned, one can value the fee simple interest of a leased fee property (one usually has to do that valuation anyway to determine if there are any adjustments warranted when comparing different ownership interests or sometimes the terms/conditions of the structure of those interests if the interests are the same type).

 

[Elliott]

NLC asked, "If there is a lease, then why would the appraiser not cite the property rights as Leased Fee Interest?"

Because he'd have to do a rent analysis, determine the value of the leasehold, if any, and adjust the fee simple. It would be a lot of work, and probably bear no relationship to market value indications from the SCA.

The only time leaseholds were ever a consideration for me in residential work was a condominium project with a reversion. I understand they are common in Hawaii.

 

[mark hurlock]

Yes, a leased fee estate is created upon leasing a fee simple property.

However, just because the property is currently leased, does not mean you must perform a leased fee “analysis”.

An analysis of a leased fee estate is only considered relevant for long term leases. Since residential leases are short term by definition, you would not be “analyzing” a leased fee estate. Your “analysis” is still based on fee simple.

The form asks what property rights are “being appraised” not what type of ownership does the borrower currently have.

 

[Carnivore]

Yes, a leased fee estate is created upon leasing a fee simple property.

However, just because the property is currently leased, does not mean you must perform a leased fee “analysis”.

An analysis of a leased fee estate is only considered relevant for long term leases. Since residential leases are short term by definition, you would not be “analyzing” a leased fee estate. Your “analysis” is still based on fee simple.

The form asks what property rights are “being appraised” not what type of ownership does the borrower currently have.

I agree, but I might say that you could not appraise the property AS-IS! Seems like a minor point. I learned that from the Santora school of appraising.