Leased Fee Interest Help

[Mark K]

Steven,

I’m not arguing “the law” because I’m not a lawyer. But maybe you are and you can show me where the legal definition and the appraisal definition of “fee simple estate” differ.

According to my business law book, “Business Law, Principles and Practices” the definition of “estate in fee simple” is: An absolute inheritance, clear of any conditions, limitations or restrictions to particular heirs. It is the highest estate known to the law and necessarily implies absolute dominion over the land.” This definition falls in line with the others I’ve cited.

Personally, I consider a lease a condition, limitation, or restriction on the owner’s rights to the real estate. The owner does not have “absolute dominion” over the land when it is encumbered by a lease. It doesn't have to be codified, fee simple ends with a lease by definition.

I believe this shows that fee simple estate ends with the conveyance of a lease on real estate.

If you can cite sources that indicate otherwise, to qoute Ross Perot, I'm all ears.

 

[Fred]

Mark,
I’m not a lawyer and not practicing law, but I do try to follow it. Appraisers have been using the term leased fee for a long time, but it’s just not catching on with anyone else. To repeat, I am not saying it’s wrong to say leased fee, but you can’t tell people who say ‘fee simple as subject to leases,’ that they are wrong. After all, in plain English isn’t ‘leased fee’ obviously synonymous with ‘fee as leased?’

Please forgive me. I learned this in property law class, before I was exposed to the AI version of fee simple. So, I am a little at odds with people who take the AI as “the bible.” FWIW, the last Society dictionary has a good definition of fee simple in it.

I don’t see any problem with the definition you cite. Please note how the word “absolute” is linked to descendability in order to distinguish fee simple absolute (FSA) from interests that have a term or limit the succession of title. Even though FSA is near universal now, estates were often less than absolutely inheritable (fee tail, and so forth).
"absolute inheritance, clear of any conditions, limitations or restrictions to particular heirs"
Please note the same idea in Blacks – absolute is linked to inheritability
“limited absolutely to a person and his or her heirs.”

Contrast that with the AI definition.
“Absolute ownership unencumbered by any other interest or estate “
See how the AI changes the link between absolute and inheritability to a link between absolute and “unencumbered ownership.” Oops!

With all due respect, the AI is plainly wrong on these points because FSA is perpetual and survives encumberances. For example, one type of encumberance is a lien and one type of lien is a mortgage. A mortgage does not negate fee simple (and no oen says they are appraising the “mortgaged fee”). And while no one contends that a mortgage deprives the fee owner of any of the sticks in the bundle of rights, the mortgage nonetheless creates “an interest” in the land and would defeat the FSA the way the AI defines it (no “other interest”). Here is the Supreme Court on the very point that a mortgage creates "an interest."
“The term interest, as applied to land, according to many authorities, may be something different from a right to land in fee simple; yet it cannot be doubted, that he who has a fee simple has an interest in the land. A term for years is an interest, and so is the right both of mortgagor and mortgagee.”
It should be plainly obvios that there are virtually no lands in the US with unencumbered interests - even if it is just the utility easement that allows the power companty to enter the property to read their meter.

There should be little doubt about the risks of using 21st century semantics to interpret medieval terms and proclaiming that one, and only one, order of words (leased fee versus fee as leased) is “correct.” All of these words have multiple meanings. Even the word "tenant" literally means anyone who "holds" an interest. And we do refer to fee owners as tenants sometimes - joint tenants, tenants by the entirety. tenants in common.

 

[Mark K]

Steve,
I'm not telling anyone that they can't say "fee simple subject to a lease", I'm just saying that I believe that "fee simple subject to a lease" is a self-contradictory phrase according to everything that I've been taught and everything I've read. And I haven't seen anything to convince me otherwise yet. That phrase just seems like an easy way to get around a problematic issue for the secondary market. Instead of Leased Fee, they allow appraisers to call it Fee Simple Subject to a Lease,...wink,nod. If the secondary market forms has the correct boxes to check, perhaps more appraisers would be aware of the differences in ownership estates.

It would be interesting to read the entire opinion by the Supreme Court so their comments can be taken in context because there is a difference between a lien or mortgage and a lease. I know of no lien or mortgage that cannot be removed by the owner with payment in full giving the owner the option to cancel that interest at any given time. In contrast, most leases cannot be removed from the real estate without agreement from all parties.

I agree that there are no unencumbered lands in the US, that is why most definitions refer to absolute ownership subject only to the four powers of the government.

 

[Joker]

I can accept the terminology "fee simple subject to lease" if you can accept my point that rates, terms and condition of a lease has a direct impact on property value. Additionally, failure to recognize and report this impact on value may be misleading to the client.

And if you can accept that point, you can understand the point I have been trying to make. That being that we, as appraisers, can measure the value of the lessor's interest (or stake), a lessee's interest (or stake), and the unemcumbered interest. And that the appraisal terminology for these values are Leased Fee Interest, Leasehold Interest, and Fee Simple Interest, respectively. I understand that our terminology does not necessarily coincide with other professions. Try using net income from a CPA's income statement for your Income Capitalization Approach and see if your value becomes skewed. Or for that matter, ask an attorney to define HBU :rainfro:

After all this, if we still don't agree, at least we can be friends:

 

[Fred]

Mark, there is some difference between your last post

I'm not telling anyone that they can't say "fee simple subject to a lease",

And a prior post

And when I do reviews on income property reports and the appraiser has called the interst appraised fee simple I note this as an error in my review.

You say

according to everything that I've been taught

That’s not true any more, is it? Now, we both have been taught both ways - the regular version and the AI version.

That phrase just seems like an easy way to get around a problematic issue for the secondary market.

I don’t see why. If they don’t want to underwrite non-owner- occupied properties, the occupancy box says, “tenant.” Maybe people who haven’t bought into “leased fee” as the sole correct term, aren’t making some of the assumptions you are making. I don’t find it misleading, because that is what I recognized as correct – a property owned in fee simple occupied by a tenant.

Posted by Doug

if you can accept my point that rates, terms and condition of a lease has a direct impact on property value. Additionally, failure to recognize and report this impact on value may be misleading to the client.

I think we all agreed about this appraisal problem are just working out semantics. I have no problem with what you said, even if the way you said puts a crick in my neck. The existence of a lease means that there is already more than one interest, each with its own value. So, while I resist the notion that there is “a” property with “one” value that has been “impacted” into another value by the lease - I am sure you know how to hanlde every appraisal request.

And that the appraisal terminology

I think going off into a closet and making up new terminology for things that are already recognized in business, academics and law is the root of some of these problems. How are we to communicate (in a manner that is not misleading) with the rest of the world, if we refuse to use their vocabulary? Look at what we have in this thread – appraisers arguing that quoting exactly what it says on the deed is somehow misstating the form of ownership because it doesn't jibe with terms that appraisers made up.

 

[Joker]

Since you are working on new terminology, don't exclude "directed value"- That value that the client insists the property is worth, regardless of market support. :rofl:

I suppose the viewpoint from which I was looking at this thread was the same as a client I once had. (Using appraiser terminology) They always wanted the value of the leased fee interest and NOT the value of the Fee Simple. This was unfortunately AFTER they found themselves undercollateralized on several commercial properties in which the borrower defaulted. One lease offered right of first refusal to the lessee for a predetermined amount which was around half of the property's value. The appraiser before me appraised the property as if unencumbered by the lease. The borrower could not understand why his $450,000 property wasn't worth $450,000. Duh! Because he offered the lessee the option to buy it for $200,000. BTW-The lessee bought the property and resold for $450,000 in back to back closings.

Has this deceased equine received enough lambasting?

 

[Mark K]

Steven

I keep wanting to walk away from this thread and was almost there until your last paragraph. Walk away not because I agree with you but that we seem to have reached an impasse on definitions. Fine. That's OK....BUT...

You state they we are trying to contradict what is spelled out on deeds, something that you might have mentioned in an earlier reply but I let slide.

I'm in the middle of a 25 parcel right-of-way project and have in front of me 25 deeds on different pieces of real estate. NOWHERE on any of these documents (all of which were recorded in the last 2-30 years) is the ownership interest addressed. They are all Warranty deeds and all state that the grantor warrants and conveys the property known as (legal description) to the grantee. It does not say fee simple, leased fee, leasehold, etc. While it may refer to the grantors or grantees as "tenants in common", "joint tenants" etc. this ownership relation has nothing to do with the interest conveyed.

Do your deeds specify fee simple interest in your area? I would be surprised if they do.

So some of us are not contradicting what's on the deeds, I think you are reading more into them than what's actually there.

 

[moh malekpour]

Doug,
As Steven said earlier,there is no doubt that the lease agreement may have a positive, negative or no effect on the value but does it change the property rights? Does the lease turn the fee simple estate to less than fee simple estate as you call it a lease fee estate? The answer is no.
A lease is only an agreement between parties and can be drawn in different shapes and forms. A lease can be subject to termination upon a transaction or a month or 3 days notice from the landlord or tenant. Are those homes with leases that are subject to termination upon quick notice or transaction less than fee simple too? A lease is just like a functional utility that can be curable or not curable. A curable functional utility is like a flexible lease and a non curable is like a lease that cannot be terminated till the end of the term. Both may have effect on value but non of them change the property rights from fee simple to less than fee simple. That is my common sense.

 

[Fred]

Mark

Do your deeds specify fee simple interest in your area? I would be surprised if they do.
So some of us are not contradicting what's on the deeds, I think you are reading more into them than what's actually there.

Mark, you have a point. There are deeds that do not state it, but there are deeds that do. Some deeds state in right in the title of the document, as if “fee simple warranty deed.”

It's up to you, but you just might consider the possibility that I am not just making this stuff up. A good place to start is to ask yourself what the seller “warrants” in “warranty” deed.

I suppose in most modern state codes, it's “statutory” that a properly prepared warranty deed means fee simple and that is why many modern deeds do not EXPLICITLY state fee simple. But that form of ownership is nonetheless what the deed indicates.

From the New Hampshire state code
477:27 Statutory Form of Warranty Deed. – A deed in substance following the form appended to this section shall, when duly executed and delivered, have the force and effect of a deed in fee simple {1} to the grantee, heirs, successors and assigns, to his and their own use, with covenant on the part of the grantor, for himself, his heirs, executors and administrators, that, at the time of the delivery of such deed, he was lawfully seized in fee simple of the granted premises, that the said premises were free from all incumbrances, except as stated{2}, that he had good right to sell and convey the same to the grantee, his heirs, successors and assigns, and that he will, and his heirs, executors, and administrators shall, warrant and defend the same to the grantee and his heirs, successors and assigns, against the lawful claims and demands of all persons.
{1} See what I mean by statutory
{2} And notice again, fee simple is not free of encumbrances (again contradicting the AI definition of fee simple).

From the Alaska state code.
AS 34.15.030. Form of Warranty Deed.
(a) A warranty deed for the conveyance of land may be substantially in the following form, without express covenants:
"The grantor (here insert the name or names and place of residence) for and in consideration of (here insert consideration) in hand paid, conveys and warrants to (here insert the grantee's name or names) the following described real estate (here insert description), located in the State of Alaska.
"Dated this . . . . . . . . . . day of . . . . . ., 2. . . . . ."
(b A deed substantially in the form set forth in (a) of this section, when otherwise duly executed, is considered a conveyance in fee simple to the grantee and the heirs and assigns of the grantee, with the following covenants by the grantor: (1) that at the time of the making and delivery of the deed the grantor is lawfully seized of an indefeasible estate in fee simple to the premises described, and has the right and power to convey the premises; (2) that at the time of making and delivery of the deed the premises are free from encumbrances; and (3) that the grantor warrants the quiet and peaceable possession of the premises, and will defend the title to the premises against all persons claiming the premises. The covenants are binding upon a grantor and the heirs and personal representative of a grantor as if written in the deed.

This is from a software thing I have with legal forms.
WITNESSETH:
WHEREAS, Grantor is fee simple owner of the property located in________ , that is described in the attached “Exhibit A” and hereinafter referred to as the “Property;” and

And here is a legal forms web site.
http://www.ilrg.com/forms/wrntdeed.html

And this
http://tgexpress.tghawaii.com/assets/publi...ry/warrdeed.pdf

 

[Mark K]

Alaska example:

(b A deed substantially in the form set forth in (a) of this section, when otherwise duly executed, is considered a conveyance in fee simple to the grantee and the heirs and assigns of the grantee, with the following covenants by the grantor: (1) that at the time of the making and delivery of the deed the grantor is lawfully seized of an indefeasible estate in fee simple to the premises described, and has the right and power to convey the premises; (2) that at the time of making and delivery of the deed the premises are free from encumbrances; and (3) that the grantor warrants the quiet and peaceable possession of the premises, and will defend the title to the premises against all persons claiming the premises.

In (a) A deed... is considered a conveyance in fee simple to the grantee...with the following covenants by the grantor:...


#1. (1) above, does the owner have an indefeasible estate in fee simple at the time of conveyance?

#2. (2) above, are the premises free from encumbrances?

#3. (3) above, can the owner convey possession of a leased property?

To me, the above definition says that if 1,2 and 3 are true, than you have conveyed a deed in fee simple. If 1 or 2 or 3 is not true, the conveyance is not necessarily fee simple but some other estate. The deed does not create the estate.

I guess we just need a "leased fee simple" definition added to the books and the problem will be solved.

Note to anyone else reading the last couple of pages of this post: I promise I'm finished. No more replies to this thread. No kidding. My apologies to the originator for the tangent.