Fee Simple vs Leased Fee

[Fee4me]

I disagree Pete. No where in SR 1-4d does it indicate that a value of a Fee Simple interest has to be developed or reported. It simply states that when valuing a leased fee or leasehold interest you must analyse the terms and conditions of the lease and report their affect on value, if any. (further - it doesn't say anything about their affect on the value of a fee simple interest).

In practice many appraisers begin the valuation of a leased fee interest by 1st establishing a hypothetical fee simple value. This may aid in complying with SR-1-4d but it is not a requirement.

 

[Pittsburgh Pete]

then how do you interpret SR 1-4(d) and how would you comply with this USPAP requirement?

 

[Fee4me]

Assuming you are appraising a leased fee interest....

You determine contract rent and lease terms are at market. "The leases were found "at market" and do not negatively or positively affect the leased fee value of the property."

You determine the contract rent is below market and there are several years left on the lease. You would likely conclude and state that the below market rent and duration of such negatively affects the value of the leased fee interest.

You determine them above market - they were found above market and positively affect value.

 

[Pittsburgh Pete]

A bit simplistic. So the rents (above, below, or at market) affect value relative to what?

And how can something positively or negatively impact the leased fee value--leased fee value is what it is. Aren't you dancing around the fact that the leases result in a leased fee value being above or below the fee simple value?

 

[Pittsburgh Pete]

So to summarize, if rents are higher the leased fee will be higher and if the leases are lower the leased fee value will be lower. Duh!

 

[Fee4me]

I believe it is as simple as that - The rule is in regards to the appraisal of a leased fee or leasehold interest and the affect on value the lease giving rise to the interest has.

I believe USPAP just wants to make sure its made clear to the reader that the lease has positively, negatively, or has had no affected on the value of the particular interest.

Had they intended to require a statement regarding the value of the appraised interest in relation to the value of the fee simple interest I think they would have stated such. Furthermore, one could argue, this would have also required you to establish a value for the fee simple interest anytime a leased fee or leasehold interest is appraised.

 

[Lawrence R.]

To all involved.

Great thread. I have enjoyed reading it. Good points to consider all around.

 

[Pittsburgh Pete]

I believe it is as simple as that - The rule is in regards to the appraisal of a leased fee or leasehold interest and the affect on value the lease giving rise to the interest has.

I believe USPAP just wants to make sure its made clear to the reader that the lease has positively, negatively, or has had no affected on the value of the particular interest.

Had they intended to require a statement regarding the value of the appraised interest in relation to the value of the fee simple interest I think they would have stated such. Furthermore, one could argue, this would have also required you to establish a value for the fee simple interest anytime a leased fee or leasehold interest is appraised.

But what value? Don't you see where your take ignores a designated benchmark? The affect on what value? Leases clearly impact value but what 1-4(d) addresses is how the leases impact what would be the fee simple value.

I know that my clients request such info--the bankers that is.

 

[GregoryK]

I have to agree with Pete on this.

The leased fee value can only
1) be greater than the Fee simple value, implying a favorable lease arrangment, which then triggers the question, what is the likelihood of renewal or

2) less than the value in fee simple, thus adversely affecting the value at which point begs the question, what is the likelihood the lease could be bought-out, increasing the value of the property to its value in fee simple.

I think you need to answer the question, what is the value in fee simple before those questions can be answered.

Personally I dont think it arises to a Hypothetical Assumption. The property is what it is . . .the issue as I understand it is how that lease affects the property value.

 

[Pittsburgh Pete]

We need one of the high priests of USPAP to chime in here--preferably one with a commercial background.