Hotel Appraisal - Fee Simple vs Leased Fee

[JL-]

A colleague has recently told me that AI guidance on fee simple vs leased fee indicates that there would be a leased fee interest in an operating hotel because if there is any consideration exchanged for the right of use of any portion of a property there is a leased fee interest. His thinking, and his understand of the AI thinking, is that the payment of nightly guest room charges is a essentially a short term lease and meets the definition for consideration exchanged for the right of use of a hotel. Therefore, any appraisal of an operating hotel should report a leased fee value rather fee simple.

Any thoughts here on the issue?

Thanks

 

[Meandering]

Now you know why so many people are happy, weed is legal in a lot of places.

So they want you to report the income from a leased fee perspective with the rights of fee simple, and let's face it, the motel manager can make a "renter" move to a different room, and no "renter" will be able to file a lawsuit and claim they don't have to change rooms because they have leasehold rights to the room they are in.


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[Russ Kitzberger]

What that is referring to is the saleable interest.

You have to determine the subject of the assignment: leased fee, fee simple, going concern, saleable interest, etc.

Occupancy does not determine the legal interest that is the subject of the assignment. It can have an effect on how the data is analyzed, but not the subject of the project, which is always a legal interest in the real property.

 

[JL-]

What that is referring to is the saleable interest.

You have to determine the subject of the assignment: leased fee, fee simple, going concern, saleable interest, etc.

Occupancy does not determine the legal interest that is the subject of the assignment. It can have an effect on how the data is analyzed, but not the subject of the project, which is always a legal interest in the real property.

I might be misunderstanding you, but occupancy can absolutely create a legal interest. For example, I'm appraising a single tenant retail property and the lease has expired and is on month to month terms with no options. Although the lease is expired and it has no impact on the marketability or the value of the property, there is nonetheless a leased fee interest and the value should be reported as such. The leased fee and fee simple value are going to be the same, but there is a leased fee interest created by tenant occupancy and the landlord's acceptance of payment.

My question is does this same scenario apply to a hotel and the hotel customers are essentially tenants creating a leased fee interest? I'm not sure that hotel guests have the same rights that a retail tenant has.

 

[The Warrior Monk]

A colleague has recently told me that AI guidance on fee simple vs leased fee indicates that there would be a leased fee interest in an operating hotel because if there is any consideration exchanged for the right of use of any portion of a property there is a leased fee interest. His thinking, and his understand of the AI thinking, is that the payment of nightly guest room charges is a essentially a short term lease and meets the definition for consideration exchanged for the right of use of a hotel. Therefore, any appraisal of an operating hotel should report a leased fee value rather fee simple.

Any thoughts here on the issue?

Thanks

Legally, hotel guests and rental property tenants are treated differently. Hotel guests do not have the same rights as tenants. It is possible that a hotel guest could become a tenant if they stayed longer than a certain period of time, often 30 days. Thus the hotel may limit a persons' stay to avoid this situation.

As it relates to your question, it would not follow that simply staying in a hotel room, notably for a period of less than 30 days, means the guest is a renter, and that you would be dealing with a leased fee situation.

With that said, ultimately the valuation depends on the assignment condition (as Russ noted).

 

[The Warrior Monk]

For example, I'm appraising a single tenant retail property and the lease has expired and is on month to month terms with no options.

The key phrase is "month." A stay of thirty days typically establishes tenancy; less than that it typically does not. However, in your situation noted above, the "month to month" really doesn't even matter, because the tenant was already occupying the property and had already established tenancy.

 

[Russ Kitzberger]

I might be misunderstanding you, but occupancy can absolutely create a legal interest. For example, I'm appraising a single tenant retail property and the lease has expired and is on month to month terms with no options. Although the lease is expired and it has no impact on the marketability or the value of the property, there is nonetheless a leased fee interest and the value should be reported as such. The leased fee and fee simple value are going to be the same, but there is a leased fee interest created by tenant occupancy and the landlord's acceptance of payment.

My question is does this same scenario apply to a hotel and the hotel customers are essentially tenants creating a leased fee interest? I'm not sure that hotel guests have the same rights that a retail tenant has.

The subject of your appraisal is not the real property, it is a legal interest in the real property.

What is the subject of your appraisal? Leased fee or fee simple, saleable, or partial interest, etc?

 

[Terrel L. Shields]

That's not the way AI taught it to me.

 

[JL-]

Legally, hotel guests and rental property tenants are treated differently. Hotel guests do not have the same rights as tenants. It is possible that a hotel guest could become a tenant if they stayed longer than a certain period of time, often 30 days. Thus the hotel may limit a persons' stay to avoid this situation.

As it relates to your question, it would not follow that simply staying in a hotel room, notably for a period of less than 30 days, means the guest is a renter, and that you would be dealing with a leased fee situation.

The AI has been hammering the position that a lease less than 30 days, or some other short period of time, does not create a leased fee interest. 10 years ago I was taught, incorrectly, that if a lease was expired and month to month, or if the lease expired before the end of the estimated marketing and exposure time (usually 12 months) then there's not a leased fee interest. They are currently teaching that any consideration exchanged for the right of use as of the effective date results in a leased fee interest.

With that said, ultimately the valuation depends on the assignment condition (as Russ noted).

My particular situation involves a small lender that probably doesn't really understand fee simple vs leased fee and they didn't request one or other. This leaves it up to me to simply tell them if there's a leased fee interest in the subject and address it accordingly in the report. Which brings me back to my original question: does the AI stance that any exchange of consideration for the right of use result in a lease fee interest in a hotel? This is a technicality that doesn't impact the property's market value; but is there is a legal interest (leased fee) inherent in an operating hotel because it meets the AI's stance on what creates a leased fee interest? I'm just trying to figure out if it needs to be addressed in the report because there is technically a leased fee interest.

 

[PL1957]

The AI has been hammering the position that a lease less than 30 days, or some other short period of time, does not create a leased fee interest. 10 years ago I was taught, incorrectly, that if a lease was expired and month to month, or if the lease expired before the end of the estimated marketing and exposure time (usually 12 months) then there's not a leased fee interest. They are currently teaching that any consideration exchanged for the right of use as of the effective date results in a leased fee interest.



My particular situation involves a small lender that probably doesn't really understand fee simple vs leased fee and they didn't request one or other. This leaves it up to me to simply tell them if there's a leased fee interest in the subject and address it accordingly in the report. Which brings me back to my original question: does the AI stance that any exchange of consideration for the right of use result in a lease fee interest in a hotel? This is a technicality that doesn't impact the property's market value; but is there is a legal interest (leased fee) inherent in an operating hotel because it meets the AI's stance on what creates a leased fee interest? I'm just trying to figure out if it needs to be addressed in the report because there is technically a leased fee interest.

Generally, the valuation of a hotel will be of the going concern, with allocations to the real estate, FF&E and business. The allocation of the real estate component would be of the fee simple Interest.