Leased Fee Interest Help

[Mark K]

Moh

"Leased Fee and Leasehold: Income producing properties are frequently leased. A lease creates two or more marketable interests in the realty. The owner's (lessor's) interest is termed the Leased Fee; the tenant's (lessee's) interest is the Leasehold Estate. Both may have either Market Value or Investment Value, or both. Eash is valued separately. The appraiser must be capable of dealing with this situation in appraising income properties." "Income Property Valuation", Kinnard, Heath Lexington Books.

The owner of any property that is subject to a lease has a leased fee estate in the real estate. Apartment buildings, duplexes, leased commercial buildings, leased SFR, and any other leased real estate is included in the leased fee category.

If you choose to call it fee simple, thats up to you but be aware that the correct term is leased fee.

The Small Income form 72/1025 has only fee simple and leasehold so this can be troubling. I used to mark fee simple and note in the remarks that it is subject to a lease and the property rights appraised are actually leased fee. Now I leave the boxes unchecked and state in the report that it is leased fee when I have to use these forms. How can you accurately mark fee simple when someone else has a legal interest (lease) and possession of the real estate? Fee simple means that you own all of the legal rights to the property. That's not the case when its leased.

 

[moh malekpour]

Mark,

I have no problem with the definition of leased fee or leasedhold estate. Anyone who has taken a course in real estate principle knows what those terms mean but I have problem with the interpretation and conception of those terms.

I do residential and the point here is a single family home that is leased for a period of time. As you know, FNMEA forms have two boxes for property rights appraised: fee simple and leasehold interest and three boxes fro occupancy: owner, tenant, vacant. The property rights are very important in appraising a property and you can’t be vague in identifying it.

I have appraised many tenant occupied homes based on either month-to-month lease or year to year lease. I always checked fee for those properties and check the tenant for occupancy. I am interested to know what boxes other appraisers check for tenant occupied single family homes and I was wondering why FNMAE who knows there are many tenant occupied homes that needed to be appraised has not provided a form with the third box “leased fee” to cover the ownership rights of the property the way you suggest it should be.

That is true that a fee simple property gives a right to tenannt to use or occupy for a limited period of time but it doesn’t change the fee simple interest of the owner. The leasehold estate of the tenant is the right to use or occupy not the right to own. The tenant can sublease or sell that right if there is no clause in the agreement but that is a different right.

If a single family home with a fee simple estate becomes a leased fee estate after it was leased for one month, one year or five years, then according to FNMEA, you got to find sales that are leased fee estate. How can anyone find properties that were leased at the time of sale? No body record the lease contracts and it is impossible to find out what is the lease term. Rental surveys for single-family rentals and rental comps for units are not sales comps and are not indicative of market sales. They are for market rents.

There is no different between month-to-month rent or lease and one year to one year rent or lease. The only different is the length of occupancy or length of right to use.

I believe when a single family home with a fee simple estate is rented or leased for a period of time, the owner has the fee simple estate of that home. The tenant gets a right to use or occupy. So the tenant has a leasehold estate or right to use or occupancy. The owner has a leased fee estate of that contract and has to give his right of use only. There are two different rights here: 1- rights of ownership or property rights. 2- rights of occupancy or use. We are talking about the right of ownership here. You can’t mix these two rights. That is true that the right of use put a limitation on the property so does a mortgage that the owner got to clear it at the time of transaction.

 

[Fred]

John,

Since property is leased for $1,984 per month and that is above market. The cost of capitol I would guess is between 7 & 8%. Your thoughts are welcome.

John,
Are you using the phrase “cost of capital” to mean mortgage rate? I hope you are not using that to mean overall yield rate.

The first issue you need to resolve is how likely it is that the lease will be honored. Another issue you might consider in obtaining a discount rate is that a five-year lease should have a significant impact on the marketability of the property. There is likely to be a limited supply of buyers for houses they can’t move into for five years.

Posted by Mark

If you choose to call it fee simple, thats up to you but be aware that the correct term is leased fee.

Fee simple is one recognized in law and in law dictionaries. I have never seen "leased fee." in there. I have seen thousands of deeds and never saw one that said, “leased fee.” Appraisers say “leased fee.” It’s not “wrong,” just less common; and potentially confusing.

Case and point

The Small Income form 72/1025 has only fee simple and leasehold so this can be troubling.

It is only troubling for those who have convinced themselves that “leased fee” is “correct.” Fannie and Freddie agree with me. Fee simple is the owner’s interest. Leasehold is the tenant’s interest. No third term is necessary.

Fee simple means that you own all of the legal rights to the property. That's not the case when its leased.

If something is rented, it is still “owned” by its “owner,” not by the renter.

So, I agree with Moh

I believe when a single family home with a fee simple estate is rented or leased for a period of time, the owner has the fee simple estate of that home.

That’s what is says on the deeds, Moh.

 

[Joker]

fee simple
n. pl. fees simple
An estate in land of which the inheritor has unqualified ownership and power of disposition.
Private ownership of real estate in which the owner has the right to control, use, and transfer the property at will.

I see where you are coming from, Moh, but I disagree that an owner of a leased property actually has fee simple estate, because he does not have the right to use.
Fannie Mae forms leave a lot to be desired. In this scenario of a short term lease on a residential propertyI would suggest appraising it in fee simple, but disclaiming the heck out of the thing. If I buy a home that is subject to lease and I expected the right to use (one of the bundle of rights), then after the sale, discover that I am bound by a below market lease and that I cannot enter my new house for 11 months, I am not going to be happy. I assure you that I would pay less for this home than an identical one that I could use immediately.

 

[Fred]

Doug,

I disagree that an owner of a leased property actually has fee simple estate, because he does not have the right to use.

There are two weaknesses in that argument.
1. I am not sure about “have” the right. But I do know that possession is not the same as ownership. The tenancy may temporarily possess use of the property, but does not own use.
2. The law does not define fee simple as possessing “use” (which is exactly why a lease does not defeat the fee simple title). Rather, fee simple is an estate that is unlimited as to “the three d’s.”
- durability (perpetual title)
- descendability (title passes to heirs on death, even in testate)
- disposability (can be sold)

In this scenario of a short term lease on a residential propertyI would suggest appraising it in fee simple, but disclaiming the heck out of the thing.

I don’t think anyone suggested ignoring the lease. I think "appraising it in fee simple" means the present value of the income stream, plus the present value of the reversion - which means addressing the exact terms of the lease.

I know that no one means it this way, but the definition of "leased fee" that was posted here, the owner's interest in a "leased" property, would literally exclue the reversion. The reversion is not a benefit of the lease and does not occur during the lease, but is a benefit that occurs from the lack of a lease.

 

[john marcinik]

I think some of you have not seen this "commerical" type of work. I have to a small degree. As residential appraisers you are use to doing thing one way and ignoring difficult situations.

The leased fee value because on the terms of the lease can have a huge impact on value. I know of one property that had a long term lease in depressed area.
But after government intervention and investor activity the area became sought after again. Because of the tenant's long term low rent lease. His value in the
property was higher than the owner's who sold it to him eventually. Or I should say the value of the lease was higher than the leased fee value.

 

[moh malekpour]

John,

Property rights appraised is the same for residential or commercial. When a property with a fee simple interest is leased, I will check the fee simple box and the tenant box to let users of the appraisal know that the property is rented. If it is for refinancing, the lender considers that as an investment property and wants to know what is the cash flow for qualification. If it is a purchase, the buyer has three options: to continue with the lease, to ask the owner to vacant the property at the close of escrow or not to buy it. It is true that a lease make a limitation on the use of property and purchasers usually want to be clear at the closing dates but it doesn’t change the ownership rights to make it less than fee simple.
There is no doubt that a lease has value and sometimes the tenant doesn’t want to vacant the property prior to the end of contract but it is irrelevant to the ownership rights of that property as it is only a temporary limitation on the use of the property for a certain period of time just like when one room is locked and no body can open it, or the garage is full of trash, or a huge trailer is parked in the backyard. All of them make limitation on the use of property but they don’t change the ownership interests of the property. Fee simple remains fee simple. The purchaser can make a condition on the sales contract to make sure the room is available, the garage is vacant, the trailer is out or the tenant is out or the purchaser may buy it in as is or not to buy it at all. Limitations may have effect on the value but they don’t change the ownership rights.

 

[Mark K]

From "The Dictionary of Real Estate Appraisal" Second Edition, published by the American Institute of Real Estate Appraisers:

Fee Simple Estate: Absolute ownership unencumbered by any other interest or estate subject only to the four powers of government.

Leased Fee Estate: An ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; the rights of lessor or the leased fee owner and leased fee are specified by contract terms contained in the lease.

Leasehold Estate: the right to use and occupy real estate for a stated term and under certain conditions; conveyed by a lease.

Lease Interest: One of the real property interests that results from the separation of the bundle of rights by a lease, i.e., the leased fee estate or the leasehold estate.

It is clear enough to me that when you convey an interest in property via a lease, you have conveyed an interest in the property to the lessee according to the terms of the contract. Therefore the property is encumbered by another interest making the owners estate less than fee simple.

Others can interpret this any way they feel necessary to attempt to support their argument. When I see something other than opinions to contradict the dictionary, I'll happily review them. The fact that Freddie/Fannie forms (notorious for their lack of compliance with USPAP) seem to agree with a particular point of view does not lend much credence to any discussion in my opinion. There's a big part of the appraisal world out there where Freddie/Fannie are meaningless. This is where I spend most of my time. All of my income property appraisals are made on the leased fee estate unless they're vacant. 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.

So I guess we'll have to agree to disagree on this one.

 

[moe cohen]

Mark
Here is where it gets a little more complicated. In NJ regardless of a lease you can not remove a tenant. Upon the expiry of a lease a tenant becomes a month to month tenant and you can not remove them, unless you have a cause.
There is an exception for a 2 family owner occupied.
Most appraisers I know will value small income property like that based on fee simple if the ontract rent is somewhat close to market rent.
I have disagreements on that.

Moe

 

[Fred]

Posted by Mark

Others can interpret this any way they feel necessary to attempt to support their argument.

Mark, I am not “interpreting.” The law is the law. If you can find in the code of one of the 50 states that fee simple absolute ends when a lease begins, I’d love to see it.

So I guess we'll have to agree to disagree on this one.

That’s not a problem for me. I am disagreeing with appraisers and you are disagreeing with property law. What you call the “the” dictionary is simply a book written by appraisers. It cannot amend the property law statutes and change legal standards that are centuries old.

To answer a question of what if the appropriate authority for a given type of citation, it seems obvious what to do. For engineering terms, you go with engineering standards. For architectural terms, you go with the architectural standards. For legal terms, you go with the legal standards. If an appraisal book differs from engineering books on engineering, differs from architectural books on architecture or differs on legal issues from legal standards – then the appraisal book is wrong. I just checked four legal dictionaries and two property law textx. None of them have the term "leased fee."

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.

And of course you say that “in your opinion,” it’s an error.