Fee Simple vs Leased Fee

[25yrcertifiedgeneral]

The lease contains a subordination clause which specifically states that the Tenant's rights will not be extinguished or terminated by foreclosure or otherwise as long as the Tenant is not in default under the Lease. Again, to imply otherwise is misleading and would need to be stated as hypothetical. I believe that the way I did it meets USPAP SR 1-4(d)

 

[Pittsburgh Pete]

If he appraises the leased fee interest - he has concluded the terms and conditions to be at market, thus the value of the leased fee interest is theoretically equivalent to the value of the property if held in fee simple.

If he appraises a fee simple interest under a hypothetical condition then the rule is not applicable as he is appraising a fee simple interest.

So this entire argument is pointless. SR 1-4(d) indicates that the impact of the leases on value should be addressed. Therefore, anyone developing a leased fee value should report a fee simple value anyway. The fee simple value (whether you want to call it hypothetical or not) should have been referenced in the report. Client has what he wants/needs and we aren't having this discussion.

 

[Fee4me]

Its not pointless, and the Fee Simple value you establish in appraising a Leased Fee interest is hypothetical. See page 112 of The Appraisal of Real Estate, 13th Edition.

 

[GregoryK]

My feeling is that the client requests a fee simple value because of a particular need on their part. And they may have serious concerns of the lease being arms-length. You stated that when the lease began, the property owner had a 100% ownership of the tenant leasing the space. Evidently he has sold a majority interest since, but still owns a 25% interest in the company leasing the space. This may therefore triger the need to know the value in fee simple. Personally I would nmake the extraordinary assumption the lease was voidable, as per the client's request. And again if the rent and lease terms are consistent with current market terms, the value could not be misleading since both interests should have approximately equal values. While it could rise to a hypothetical assumption, I would first discuss this with the client. Like I said, I am sure there is a specific reason for them to request a fee simple value.

 

[Pittsburgh Pete]

Its not pointless, and the Fee Simple value you establish in appraising a Leased Fee interest is hypothetical. See page 112 of The Appraisal of Real Estate, 13th Edition.

It's pointless insofar as the fee simple value should already have been in the report--see USPAP 1-4(D). Call it hypothetical, call it ridiculous, call it whatever. The impact of the lease on value should have been addressed--not sure how you intepret that requirement but I've always taken it to mean that I should report the fee simple value in addition to the leased fee value.

 

[GregoryK]

Pete, I agree . . . it is the lease that affects the value. Fee Simple interest is absolute, a lease can add or distract from the value in fee simple. My next question is . . . what was the interest of the properties you used in the sales comparison approach? If they were leased, were they leased at market rates and terms? If not leased, what adjustments, if any were made?

In recent years we have seen a number of requests for appraisal of shopping centers, usually requesting a value in fee simple? Why, tenant default rates remain higher than normal, currdent lease terms and rental rates are typically lower than when many of the leases were originated, and there is enough vacant inventory to allow a tenant to move elsewhere, often at much more favorable terms for the tenant.

 

[GregoryK]

I just went over our log for last year. I did not find one request for the Leased Fee value only. Anytime the Agreement asks for Leased Fee Value, the Fee Simple Value was also to be estimated. We did around 1,000 appraisals for lenders in 2011, so I would think statistically this tells us something.

 

[Fee4me]

Again, read page 112 (and 114) of the 13th edition. To 1st value the fee simple interest of a leased property you assume it could be held in fee simple. That's the whole point of this discussion - any valuation of a fee simple interest for a leased property is hypothetical, as the property is encumbered by a lease and cannot be held in fee simple.

So when valuing and reporting a leased fee interest one often starts by valuing the fee simple interest - which assumes the property is unencumbered. However, most do not clarify this when reporting the fee simple value.

When only valuing a fee simple interest of a leased property (assuming the lease is enforceable) it has to be done hypothetically as the property cannot be held in fee simple - it is encumbered by a lease.

 

[Ken B]

I feel the need to play Santora and point out that there isn't really any such thing as ownership in Fee Simple Estate in an absolute sense. I'm not aware of any owner who can do anything they so desire with their land. Thus, any valuation of the interest in Fee Simple Estate is hypothetical.

 

[Pittsburgh Pete]

Again, read page 112 (and 114) of the 13th edition. To 1st value the fee simple interest of a leased property you assume it could be held in fee simple. That's the whole point of this discussion - any valuation of a fee simple interest for a leased property is hypothetical, as the property is encumbered by a lease and cannot be held in fee simple.

So when valuing and reporting a leased fee interest one often starts by valuing the fee simple interest - which assumes the property is unencumbered. However, most do not clarify this when reporting the fee simple value.

When only valuing a fee simple interest of a leased property (assuming the lease is enforceable) it has to be done hypothetically as the property cannot be held in fee simple - it is encumbered by a lease.

It might be helpful if you read what I wrote. What is your take on SR 1-4(d)? Call it hypothetical if you want, I don't care.

The client wants a fee simple value--it should have been there if you complied with SR 1-4(d). And that ain't hypothetical. Call the value indication hypothetical if that's what you prefer but the value should have been reported. Get it!?