Income Approach?

[Deleted member 152047]

What part of it did they not sell? The fact it is encumbered by lease isn't going to change the fee simple.

Okay, technically they sold the fee simple estate subject to a leasehold interest. They conveyed the leased fee interest in the property.

 

[ucbruin]

Regarding SFR and 2-4 properties.....

If "all" appraisers have been completing reports in the same manner.....
If our clients expect and accept completing reports in the same manner....
If the secondary market expect and accept completing reports in the same manner....

Why all the hubbub?

 

[Addie]

So you are telling us that the CA BREA does selective enforcement. I call BS. But than again it is California.

Believe me now?

Not word for word, but the conversation went like this. Addie, you are correct, a HC is appropriate. I then went on to ask what they do and see. They said they don't look into it and basically ignore it unless it is part of the value being disputed. This particular person said they have never seen it come up. Unless it damages the client, they don't do anything about it.

So they agreed on a HC needs to be used. I'm betting they don't do anything with it because 99.99% of tenant occupied appraisals would get a violation.

 

[J Grant]

I'm betting they don't do anything with it because 99.99% of tenant occupied appraisals would get a violation.

More like 99.99% of tenant occupied appraisals are done correctly, and this person from BREA is either misinformed about a HC use for the conversation or had no idea of what you were talking about. ( you can even confuse us mixing up jargon, ownership rights and value issues)

It's ludicrous to think reviewers, clients, Fannie, regulators have allowed for decades tenant occupied properties to be done "incorrectly" . If they believed that, we would have heard it by now loud and clear. If and when appraisers feel a need for an HC an appraisal whether tenant or owner occupied can be done with an HC /made subject to HC.

 

[George Hatch]

Wait until you appraise a property where the owner is leasing to themselves.

Just because there's a lease doesn't always mean that's the property interest that would most likely convey upon consummation of the hypothetical sale that MV assumes.

Again, with SFRs an actual lease encumbrance can affect marketability regardless of whether there's any disconnect between the market rents vs the contract rents.

 

[Addie]

Wait until you appraise a property where the owner is leasing to themselves

Unless that's a trick question, that would be easy. That 1 person holds it in fee simple by way of leased fee + lease hold = fee simple. That 1 person holds all the bundle of rights. Just 10 in left hand and 3 in right hand (making up #'s) I wouldn't argue with doing that as-is fee simple or HC and explain. That scenario I'm fine with either way.

Now what are that persons values in each of the hands, not the issue. Everyone agrees the value of fee simple interest can = value of leased fee interest or it can't. Everyone agrees the value of leased fee interest can or may not = fee simple.


What only a chief appraiser, articles, and 2 MAI's agree on is if doing as-is, it is under a HC as it is contrary to what exists. (not talking your example of owner leasing to their selves. I have no argument for doing that anyway you want as all the ways are truthful if explained)

 

[Deleted member 152047]

It is typically a bit different than that in CRE Addie. Typically, we will ask for guidance from the client. If they ask for the leased fee and fee simple values, you would use an extraordinary assumption for the leased fee that goes something like this:

The in-place lease is between related parties and it is not know whether the lease would survive a sale of the asset. The value opinion of the leased fee interest within this report assumes that the lease would survive a sale of the asset.

This is fairly common and often we do not know if xyz corp is wholly the same ownership as zyx corp. Even a slight ownership difference could create issues.

 

[George Hatch]

I wouldn't appraise an SFR/office conversion as an SFR just because a client ordered the appraisal that way. I wouldn't appraise a property with physical damage as other than that just because a client ordered the appraisal that way. I'm not going to ignore a lease just because a client orders the appraisal that way.

But yeah, if you have a legitimate reason to use a hypothetical then using one doesn't create a problem so long as you disclose your usage. If someone blows the lease off as if it didn't exist then they are using the hypothetical whether they have disclosed it or not.

 

[gregb]

IT HAS ALWAYS BEEN LEASED FEE INTEREST
JUNE 28, 2015 ADMIN


Following is a recent conversation between a bank review appraiser and a fee appraiser:

Dear Fee Appraiser,

A review has been completed on your appraisal of the Apartment located at XYZ in City, ST and am wondering if you could provide some clarity in the following area:

I am wondering how the property rights appraised can be Fee Simple, when the subject apartment building is not vacant.

Thank you for addressing this item. Please make any necessary revisions and return a revised report to me at your earliest convenience.

Thanks.

Review Appraiser

—————————————————————–

Mr. Review Appraiser,

The subject property has current contract rents on a very short-term basis (most are month-to-month), and the rental rates at completion are based on market rental rates. In both analyses, market rental rates are utilized (see Page 78). Therefore, the market value opinion is fee simple. If contract rental rates are market rental rates, the fee simple and leased fee values are essentially equivalent.

The report date has been changed to the current date to comply with USPAP. Thank you for your input.

Sincerely,

Fee Appraiser

———————————————————

Mr. Fee Appraiser,

Your prompt response has been greatly appreciated.

Please refer to an explanation regarding the leased fee interest on Page 114 of the Appraisal of Real Estate (13th edition) as follows:

“The lessor’s interest in a property is considered a leased fee interest regardless of the duration of the lease, the specified rent, the parties to the lease, or any of the terms in the lease contract. A leased property, even one with rent that is consistent with market rent, is appraised as a leased fee interest, not as a fee simple interest ……”

If the contract rent is the same as the market rent, the leased fee value becomes equivalent to the fee simple value, not the other way around.

Thank you in advance for your quick follow up on our request.

Thanks.

Review Appraiser

—————————————————————

MANN’S COMMENTS

Geez, for almost my entire 29+ year career I have had to deal with this error made by many appraisers. Thankfully, over the years, fewer and fewer appraisers think lease terms have anything to do with the property interest appraised. OCCUPANCY is essentially all that matters in this determination.

The quote the reviewer presents from the 13th Edition is 100% on target. In fact, it sounds exactly like my response over the past 20+ years….since I contribute to the each edition of The Appraisal of Real Estate and this is a pet peeve, the odds are those are words I wrote. Obviously, I like them lol

I have had exactly ONE existing apartment complex appraised as Fee Simple Estate. It was a 200-unit apartment project in Orlando in 2007 that had been vacated for condo conversion and the market crashed and that did not happen. In that case, the owner could immediately occupy all 200 units, if they so desired.

Another item the above fee appraiser assumed, that is likely in error, is that the subject contract rents were all at market. Once an existing apartment property is a few years old, it is near impossible that all of the contract rents are at market. My experience is actual income from contract rents is typically 5% to 25% (!) below the hypothetical market rent at 100% occupancy – this is often termed Economic Vacancy….and often not accounted for by many appraisers.

I encourage all appraisers to simply read the definitions of Fee Simple Estate and Leased Fee Interest. It is clear as day that lease terms are not mentioned. Also, note this nitpicky item – only Fee Simple is an ‘Estate’ – everything else is an ‘Interest.’ Why? I don’t know. I just had this pointed out to me while on The Dictionary of Real Estate Appraisal committee.

This is a long first post….but, I want to thank the Chief Appraiser who shared this item with me and allowed me to redact the emails and post the conversation above. I look forward to doing this on an ongoing basis. My hope is all of us can learn from these situations – fee appraisers, review appraisers, newbie fee and review appraisers, bank credit employees, et al.

 

[J Grant]

thanks GregB for clarificaiton

Still stuck with as is value for certain lending purposes, found this from an article on it

Many times, an appraisal is ordered for a property that is tenant occupied, but a client wants to specifically know the “fee simple” market value as if the lease were not in place. This can be performed as an additional value scenario and under the proper hypothetical condition that the lease does not exist (when that is contrary to fact). Since Interagency Appraisal and Evaluation Guidelines require an “as is value” free of any hypothetical conditions, the market value of the leased fee estate should be reported as an “as is” value, in addition to the hypothetical value of the fee simple estate “as though unencumbered”.