Leased Fee Interest Help

[Neil Leggett]

Mark: You have it right. Cheers for defending your argument over and over.

Steven: I have a property that I recently paid $70,000+- for on a fee simple basis. I was going to sell it at a profit, but for you I will sell it at a $5,000 loss. Yes, I will accept $65,000 for it tomorrow from you only! What a deal! The only stipulation is that you allow my mother to rent it from you at a rate of $25 per month over the next 30 years. Are you game? If not, why? Could it be because your rights would be limited because you would could not use the property or sell it for what you have in it? Hmmm.... <_<

If you want to argue that terminoligy differs between professions that's fine. But in order to perform an accurat appraisal, you have to be able to recognize the impact on market value when a property is under or over leased.

I am a commercial appraiser with extensive experience in fee simple vs. leased fee. As with any rule, there are gray areas. For example, if a property has a short term lease of only 3 months, I am tempted to call it fee simple because the property is not really encumbered that much. The key is to explain your rational. There is no definite line of what is fee simple vs. leased fee. Just use your best judgement. As an example, what do you call a motel that is leased on a nightly basis? What about a motel that is leased weekly or apartments that are leased on a six month basis? I appraised a motel just last month that was leased from Mr. Smith to Mr. Jones for a 5 year term. Mr. Jones in turn leases it nightly. I was obviously appraising a leased fee interest due to the 5 year lease. But what if that lease was not in place?

 

[Joker]

I think what Steve and Moh are arguing are that very basic legal terminology, fee simple means that the property can be transferred and that the owner of record has a deed that is stated to be fee simple.

In a lease situation, the tenant has a non-freehold estate. This non-freehold estate removes one of the sticks in the bundle of rights; that is the owner's right to use. When the lease is terminated (and not until) the owner once again has freehold (fee simple interest) estate of the property. The owner still has "fee simple" but it is subject to the non-freehold estate of the tenant. Many times leases are recorded and when they are, they appear in title searches as an encumbrance, the same as a mortgage does.

Neil, I like your examples. I have another. I was appraising a property for condemnation. It was a fuel mart. Company A owned the proerty and leased it to Company B. Company B constructed the fuel related components and leased it to Company C. Company C constructed the building and operated the business. Guess who the state paid and for what. Companies A and B got paid for their interests in the property, and Company C got paid for loss of business, as well as the non freehold interest in the property.
The state's appraiser took the position that it was fee simple and appraised that interest only. The opposing counsel and I believed that all 3 companies had damages and I appraised the interests accordingly. The state settled out of court at my figures, so there is no case I can supply for precedence, but I offer their willingness to settle as evidence of my argument.

Like Mark, I am trying to quit posting here

Hey Neil-Can you share the details of that motel lease to me in a PM?

 

[Paul Ness MAI]

Legal ownership interest versus the value of same...

I confess I haven't read this whole thread, just kinda started reading from back to front when I came across Moh's comment that a lease doesn't change the ownership interest. By definition it certainly does. It reduces the owner's bundle of rights and using the correct legal terminology, the name of the owner's interest is the leased fee. When a lease is in place, nobody owns the fee simple interest. A leased fee (owner) and leasehold (tenant) interest exist, both of which can have value and can be transferred. However, when a lease is in place it is impossible to purchase the fee simple interest. Important - notice what I did not say. I did not say an appraiser could not estimate the value of the fee simple interest of a leased property.

As someone else said, the VALUE of the leased fee and fee simple interest may be identical, but it is still a different ownership interest because the tenant has certain rights to the property. If a lease is month-to-month or has an otherwise short remaining term, the lease will have little impact on the value, but there is still a leased fee interest. Further, if the rent is less than market the leasehold interest may have value. Regardless of whether or not a leasehold interest has value, the tenant has a leasehold interest which gives them the right to occupy the property. As long as there is a tenant, the owner does not have a fee simple interest.

I guess the question is must an ownership interest have value to exist? I say no. That's my story and I'm sticking to it.