Fee Simple vs Leased Fee

[25yrcertifiedgeneral]

I was engaged to appraise a manufacturing property for "as is" and "liquidation" values. The property owner had occupied the building under a separate entity. Upon inspection, I found that the property owner had sold 75% of the business interest to an unrelated party. There is a long term lease in effect that represents market conditions. I completed the assignment stating Leased Fee Interest. The client wants me to change the reported interest to fee simple. I think that I should only do this by stating in a number of places that this would be a hypothetical value, ignoring the existing lease.

 

[Pittsburgh Pete]

I was engaged to appraise a manufacturing property for "as is" and "liquidation" values. The property owner had occupied the building under a separate entity. Upon inspection, I found that the property owner had sold 75% of the business interest to an unrelated party. There is a long term lease in effect that represents market conditions. I completed the assignment stating Leased Fee Interest. The client wants me to change the reported interest to fee simple. I think that I should only do this by stating in a number of places that this would be a hypothetical value, ignoring the existing lease.

So the long term lease is at market. If so, your leased fee value and fee simple value should be the same. It's not a hypothetical--it's the value of a different interest.

 

[25yrcertifiedgeneral]

but can I ethically call it fee simple? A perspective buyer is only buying the leased fee interest. The bank would only be foreclosing on the leased fee interest. I don't see how I can ethically call it anything else. This is my fight with the bank.

 

[Pittsburgh Pete]

You are merely outlining the values of two separate ownership interests. We often report both values to clients so that they can see the impact of the leases on the property value.

 

[Fee4me]

I don't post on here much, but in my opinion you are correct to use a hypothetical condition. Pete's response seems to be quite common too though, although I haven't figured out why. Read pages 111-114 in the 13th edition.

The fee simple interest in the subject essentially disappeared when the lease went into effect - fractionalized into the leased fee interest (held by the property owner/landlord) and leasehold interest (held by the tenant). The fee simple interest still exists, but it can't be held by one person at the present time.

Ask and answer these questions regarding the basic premise of the appraisal - a hypothetical sale on the effective date:

There is a lease in effect... what interest is transferred by the owner? Answer: The only interest that the owner can transfer - leased fee

Now, assume there is no lease in effect (a condition contrary to what exists), what interest is transferred by the owner? Answer: fee simple

Therefore, in order to appraiser the fee simple interest you must 1st allow it to exist (un-fractionalized). Using a hypothetical condition accomplishes this.

If the subject were leased by a related entity and one could reasonably assume the lease could be absolved at sale, you could use an extraordinary assumption assuming such. However, in this instance the property owner is a minority owner in the lessee company and that assumption may be a stretch.

USPAP requires the appraiser to state the property interest appraised and to "substantiate" such. In my opinion, the hypothetical condition substantiates appraising the fee simple interest of a property that is encumbered by a lease.

 

[Fee4me]

You are merely outlining the values of two separate ownership interests. We often report both values to clients so that they can see the impact of the leases on the property value.

The interest appraised is leased fee - the fee simple value reported in conjunction is hypothetical in nature (and should probably be stated as such since the property is encumbered by a lease and the property cannot be held in fee simple).

 

[25yrcertifiedgeneral]

Thanks for the reply. I really don't understand the review question. I have simply stated a fact regarding the interest appraised. I think it was appraised previously under the same circumstances and the other appraiser didn't give any real justification for giving a fee simple value and completely ignored the lease. It's my understanding that he stated it was owner occupied and that there may be a non-arms length lease which he didn't have.

 

[Ken B]

If the lease is between related entities, in a market transaction between unrelated entities, what is the probability of the lease being vacated? Does HABU indicate this is an owner-user property or an investment property?

If the most probable purchaser is an owner-user and the lease between related entities is likely to be vacated upon transfer, the interest to be transferred and valued is in the fee simple estate.

If the most likely purchaser is an investor and the lease between related entities is likely to be vacated upon transfer, the interest to be transferred and valued is in the fee simple estate.

If the most likely purchaser is an investor and the lease between related entities is likely to be transferred to the purchaser, the interest to be transferred and valued is the leased fee.

Yes, right now, there is a lease in place, but would the lease survive transfer of title?

 

[25yrcertifiedgeneral]

My contact was the 75% owner of the business (tenant). He indicated he had no intentions of vacating the property on a transfer. The property is currently listed for sale in Leased Fee. Thus, the value appraised was Leased Fee.

 

[Ken B]

The guy that got hit by a truck this morning had no intention of being run over today.

The question regards the nature of the most probable purchaser.