Fee Simple vs Leased Fee

[sputnam]

If the assignment per the client is to report the market value of the fee simple interest, that's what you do.

 

[Lawrence R.]

Not precisely the issue, but I came across this today.

From perusing Inter Agency Guidelines. This is on page 55 of 70:



Non-market Lease Terms:

For properties subject to leases with terms that do not reflect current market conditions, the appraisal must clearly state the ownership interest being appraised and provide a discussion of the leases that are in place. If the leased fee interest is being appraised and contract rent is less than market rent on one or more long term lease(s) to a highly rated tenant, the market value of the leased fee interest would be less than the market value of the unencumbered fee simple interest in the property.64 In these situations, the market value of the leased fee interest should be used.

 

[leasedfee]

It is leased fee. The owner has given up various sticks in the bundle of rights in exchange for rent to a third-party. The owner has given up the right to

• use

• occupy

• quiet enjoyment

• demolish

• not use

• convert

• subdivide

• exclude *, and

• lease to someone else.

• The lease may specify to the degree that the owner or the tenant has the right to sub-lease or whether the tenant has a right of first refusal that trumps the owner's right to transfer the property.

* which has been subject to statutes and court rulings

A third-party controlling the majority of the company of the leasehold can enforce its rights in a court of law. The owner has retained, in the bundle of rights, the right to transfer, gift, will, and mortgage (usually protected by a subordination clause in a lease). A well written lease should subordinate the tenant's rights to the superior eminent domain right that the government has over the fee simple rights.

Hence, the LF value is the As Is scenario.

We cannot assume that a big landlord will bully out a naive 23 y.o. tenant out of a valid apartment lease so that the LL can condominiumize the building in a hot market -- tho' this really does happen.

Therefore, the FS value does not exist unless a hypothetical condition is made.

In contrast, a non-arms length lease between the property owner and his/her company can be re-written willy-nilly over his/her bowl of Cherios, and re-written again later that day over his/her Big Mac. Though he/she wears different legal hats -- company president and property owner -- not surprisingly he/she always seem to be in agreement. Their non-arms-length "lease" mostly serves to make the IRS happy, the company account/lawyer happy, and to provide some division in liability protection between the company and the real property.

USPAP 2012 says, line 583

"(d) When developing an opinion of the value of a leased fee estate or a leasehold estate, an appraiser must analyze the effect on value, if any, of the terms and conditions of the lease(s)."​

(emphasis added) It doesn't say that a FS value has to be developed or be reported.

Technically, MV assumes a hypothetical sale, does it not? Thus, hypothetically, if the hypothetical most probable purchaser is an owner-user and the lease could hypothetically be easily vacated as it is between related entities, hypothetically, the fee simple interest could be transferred to the hypothetical buyer.

I will respectfully disagree. The valuation is of property rights and interests. When the estate is partitioned, the fee simple no longer exists.* Investment properties routinely sell only the LF interests -- based on the rent $s that those LF interests generates. All of the comparable sales will be of the LF interests (their comparative leaseholds may require adjustment versus the subject's). The third-party tenant with a substantial leasehold is not going to "go gently in the night" to consummate a owner's sale, theoretically or actually. Likewise, it doesn't matter whether the probable H&BU would be an owner-user or not. For example, an office condo with the H&BU of an owner user but leased for $1/year for 15 years is certainly not a fee simple value, As Is. Thus, a hypothetical condition is necessary to appraise something that is contrary to what exists, the FS.

If the assignment per the client is to report the market value of the fee simple interest, that's what you do.

The FS would still be hypothetical, and would be fine to only appraise a hypothetical value for certain clients and certain situations. Many clients like Federally regulated lending institutions would still require an As Is, non-hypothetical, value.



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* Parenthetically, in urban areas, the true fee simple interest is rarely if ever found upon reading a title commitment. For example, minor utility easements are concluded to take away no substantial property interests, in terms of value or for use of a building. We are really valuing a fee simple encumbered estate, ... but this is pedantic.​

 

[Fee4me]

Leasedfee,

Well said. Perhaps they will more readily accept the arguments I tried to make a few weeks ago now that they have been set forth by an MAI.