Fee Simple vs Leasehold

[jdbiggers]

Am I making this more difficult than it should be? I am appraising a SFR which is occupied under a net lease option agreement with a part of the rent to be applied to the purchase stated in lease. I have read the lease agreement and it appears to be a straighforward net lease.
The lender who will be making a loan for all or part of the buyer's purchase price is our client.
Since my appraisal takes place prior to closing, the owner's interest is leased fee is it not? Fee simple ownership by the buyer takes place after closing.
As a newbie I would appreciate some help to clarify and possible some words/recommendations on how to address this in my appraisal.

Whose interest are you to appraise? Unless told specifically to address the tenants interest, you are dealing with the owner's interest, which is Fee. Typcially, I am not appraising a transaction, but the property, which, in your case, is currently a Fee Estate. There have been a few rare occassions (not lending purposes) where I have had to appraiser a persons' interest.

Also, be VERY careful in the distinction between "Leashold Interest" and a Tenant with a lease. We went round and round on this on another thread, but the bottom line is that a lease does not necesarily grant Leasehold Interest, but may be of Tenure/term. Just because I rent my house on a five-year lease with an option to buy and all lease payments to go toward a potential future purchase does NOT mean I have granted my tenant a Leashold Interest or Estate. I have NOT conveyed all of the bundle of rights, but only a right of use. I still own 100% FEE SIMPLE INTEREST.

While a lease may exist and that tenant has the right to utility as per lease until the expiration of such, it does NOT invalidate or cancel the Fee Estate of the owner.

Of course, there is one person on this forum, despite being wrong so often, that will tell you that all tenants have Leashold Interest no matter what facts get in the way of that opinion and that you MUST appraise the property as Leashold. Probably never owned rental properties, residential or commercial.

So, be sure whether you are dealing with a conveyance or a rental agreement.

JD

 

[xm72mhd]

Whose interest are you to appraise? Unless told specifically to address the tenants interest, you are dealing with the owner's interest, which is Fee. Typcially, I am not appraising a transaction, but the property, which, in your case, is currently a Fee Estate. There have been a few rare occassions (not lending purposes) where I have had to appraiser a persons' interest.

Also, be VERY careful in the distinction between "Leashold Interest" and a Tenant with a lease. We went round and round on this on another thread, but the bottom line is that a lease does not necesarily grant Leasehold Interest, but may be of Tenure/term. Just because I rent my house on a five-year lease with an option to buy and all lease payments to go toward a potential future purchase does NOT mean I have granted my tenant a Leashold Interest or Estate. I have NOT conveyed all of the bundle of rights, but only a right of use. I still own 100% FEE SIMPLE INTEREST.

While a lease may exist and that tenant has the right to utility as per lease until the expiration of such, it does NOT invalidate or cancel the Fee Estate of the owner.

Of course, there is one person on this forum, despite being wrong so often, that will tell you that all tenants have Leashold Interest no matter what facts get in the way of that opinion and that you MUST appraise the property as Leashold. Probably never owned rental properties, residential or commercial.

So, be sure whether you are dealing with a conveyance or a rental agreement.

JD

I missed that thread, but never mind, can we just deal with whatever it is you are trying to say.

Tell me exactly what the fundamental difference is between a leashold and a rental agreement. Why is one a real property estate and the other is not?

 

[PropertyEconomics]

How on earth could it not be extinguished when the person currently leasing and occupying the property is the purchaser?

The lease is extinguished AT CLOSING .. however, if for any reason this transaction doesnt close, and they all dont Mr. Potato .... the lease will remain in full force.
Thusly, the contract did not extinguish the lease unless it was stated so within the purchase agreement.
If the deal falls apart .. you try telling the tenant he doesnt still have a lease in the property.
Prior to closing .. the owner has a leasehold interest (landlord rights) in the property he does not hold it in fee simple interest because the right to occupy and have quite enjoyment of the property has been passed to others.

 

[PropertyEconomics]

Just because I rent my house on a five-year lease with an option to buy and all lease payments to go toward a potential future purchase does NOT mean I have granted my tenant a Leashold Interest or Estate. I have NOT conveyed all of the bundle of rights, but only a right of use. I still own 100% FEE SIMPLE INTEREST.
JD

If you have granted occupancy and quite enjoyment of your property to others by lease as stated in the original thread you do not hold the property in full FEE SIMPLE INTEREST. You have leased the property thus the lease is an encumberance on the fee .... your tenant has a leasehold interest in the property even if the value of that leasehold is only the right to occupy, it may have no monetary value at all ... but your rights as an owner are diminished to Leased Fee becasue someone else has the right of occupancy and quite enjoyment.

 

[Steve Owen]

Some of you have gotten a little off track. The case in point is a lease purchase, where the tenant will buy the property and then hold it in fee simple, subject to a mortgage loan. The most important point is the purpose of the appraisal, which is to provide basis for the lender to make a lending decision.

So, I figured, why not give you some other stuff to chew on. Some possible reasons to appraise a leased property as fee simple:

Client wants to know what his collateral will be if the lease is broken, which will probably be the case if the client has to take the property back.

Client is the leased fee owner and wants to known fee simple value for comparison purposes. (Similar to market rent analysis).

Lease is short term and does not have a renewal clause.

Long term lease is near its end point and renewal is subject to property value or market rent considerations.

Appraisal is for evaluation of Ad Valorum real estate tax purposes.

Appraisal is for book value of the real property asset.

Just about any other time the client tells you that is what they want.

In most, or more likely all, of these cases, the use of an HC, or at a minimum, disclosure and analysis of the lease would be appropriate. It is not really a good idea in most cases to appraise leased property in fee simple; make sure that the client understands the difference if you do this, and get it in writing.

However, back to the case at hand. The property is under contract. The purpose of the appraisal is to provide basis for the lender for a mortgage decision. The mortgage decision, if favorable, will most likely lead to closing of the contract, which will extinguish the lease. Even if it does not, the lease is likely moot, since most lease-purchase contracts offer the right to purchase at the end point of the lease. Appraising the leased fee estate in this situation would be an error. Again, look at the intended use of the appraisal.

 

[PropertyEconomics]

I am still going to appraise the interest in the property that exists AS OF THE DATE OF MY INSPECTION ... OR .... IM going to do a HC if the lender requires fee simple value.

You guys do what you want .... stating what EXISTS as of the date of your report will not get you in trouble no matter HOW MANY scenerios you guys want to make up.

I wish you all well in your appraisal of situations like this.

 

[Couch Potato]

An appraisal is always a hypothetical situation; the property is not sold on the date of valuation and is often not even being marketed. All of the bundle of rights exist and could be purchased on any given date regardless of the current ownership condition. A hypothetical condition is not required to appraise the value of the fee simple interest in a property.

 

[Steve Owen]

You guys do what you want .... stating what EXISTS as of the date of your report will not get you in trouble no matter HOW MANY scenerios you guys want to make up.

Oh yeah. Then consider this incident, which happened to me when I was fairly new at appraising. Company leases new construction on a long term lease. I am hired to appraise the building and land on plans and specs. I notice that indications of fee simple value are much lower than indications of leased fee value. I discuss the issue with my client, a local lender, who says to proceed with the appraisal as fee simple because they want to know what their collateral will be if they wind up with the building and land. I do.

A couple of weeks later, the stuff hits the fan. My clients partner, a lender in another state literally slams my appraisal, saying that I did not pay enough attention to the lease and came in way too low. (Never mind that the cost approach, income approach based on market rent, and sales comparison approach are all pretty close together and all pretty strong in terms of reliability.)

When I finally got to the bottom of it, turns out the developer and the leasee have board members in common. The lease was a complete sham, made for no other purpose than to raise the value for loan purposes. This would not be immediately obvious, and I'm willing to bet that the scam worked in other places. Still think that reporting what (apparently) exists won't get you into trouble?

This was the first one of these I had ever seen, but my mentor had told me about this ruse. It is not the last one I have seen. Appraisers who do leased-fee work need to keep their radars tuned... if you smell a rat, there probably is one.

 

[xm72mhd]

You guys do what you want .... stating what EXISTS as of the date of your report will not get you in trouble no matter HOW MANY scenerios you guys want to make up.

I tried to find out what you think exists on that date, but the answer was not to be. Apparently it is not the fee simple interest and PE won't discuss any other possibility. End of story.

 

[Joyce Potts]

The lease is extinguished AT CLOSING .. however, if for any reason this transaction doesnt close, and they all dont Mr. Potato .... the lease will remain in full force.
Thusly, the contract did not extinguish the lease unless it was stated so within the purchase agreement.
If the deal falls apart .. you try telling the tenant he doesnt still have a lease in the property.
Prior to closing .. the owner has a leasehold interest (landlord rights) in the property he does not hold it in fee simple interest because the right to occupy and have quite enjoyment of the property has been passed to others.

No, leases are not always extinquished at closing. Ever buy a rental property with a lease in full force and effect? It's sold with the lease intact and new owner continues to collect the rent.

Same holds true for existing mortgages. Ever buy a property where you ASSUMED THE EXISTING MORTGAGE?

It has nothing to do with the transfer of the fee simple title.