Leased Fee or Fee Simple - That is the Question

[Howard Klahr]

If so, that is based on a mistaken assumption that valuing the "leased fee" implies that the lease(s) have a significant value impact.

If you value a 300-unit apartment complex that is completely vacant save for one unit that has a lease expiring in a month, you are valuing the leased fee. If want to value it with complete disregard to the lease, you can specify that you are valuing the fee simple interest, and include a hypothetical condition that the lease does not exist.

What you are glossing over is that we do not value property but rather property rights,a defined bundle of rights. The remaining term of that single lease can impair the ability of the property owner to move forward with whatever plans they may have for the project.

Utilizing your example, that single leasehold estate is likely worth more than just the amount of the remaining lease payments. Is that not what differentiates leased fee from fee simple?

 

[PropertyEconomics]

What you are glossing over is that we do not value property but rather property rights,a defined bundle of rights. The remaining term of that single lease can impair the ability of the property owner to move forward with whatever plans they may have for the project.

Utilizing your example, that single leasehold estate is likely worth more than just the amount of the remaining lease payments. Is that not what differentiates leased fee from fee simple?

Howard I have pondered your post now for quite some time .. using the example the remaining one unit of lease only has a month remaining .. how could that leasehold position possibly have ANY value much less more than the amount of the remaining lease payment?

 

[Howard Klahr]

A single unit is delaying the property owner from moving forward with potential renovation, demolition or other intended efforts on behalf of the property owner from moving forward for whatever is remaining of the term for that single lease.

Even just 30-days and impacting only part of the property still has financial impact greater than whatever the rental amount thereby creating a leasehold value beyond fee simple. Yes, the greater the remaining term the more likely a higher impact but it still remains as an economic impact. A more extreme example is in areas with rent control where a single unit can impede re-development of an entire project.

There was nothing noted that identified at what threshold this becomes an issue only in identifying that there is one. The amount and/or degree of this threshold will vary from investor (catagory) to investor (catagory). Also the point was that there are other considerations to be evaluated when performing an analysis of encumbered real estate.

 

[PropertyEconomics]

Howard I certainly understand what you are saying, however, at 30 days remaining on the lease, I cannot imagine that either an investor or an owner would give a moments thought to the "value" of that leasehold. The loan most probably wont even close prior to the lease ending.
I certainly do understand what you are saying though.