Leased Fee or Fee Simple - That is the Question

[PS111222333444]

Hello:

I'm a contract fee appraiser that does work for a two three person shop. We occasionally appraise mixed use buildings. Each time we do, the principals of the firm insist we are to appraise the Leased Fee Interest as it is an investment property, regardless of being owner occupied in the commercial element. The subject this time is a MU building with a ground floor office representing 51.6% of the NRA. It has been owner occupied for 35 years and there is no lease document. There are also four apartment dwellings rented on a month to month basis.

The dictionary describes Leased Fee as “An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the Lessor (the leased fee owner) and the lessee (landlord) are specified by contract terms contained within the lease”.

So, I’m unclear as to why a Leased Fee Interest should be applied vs. Fee Simple Estate. And on the flip side, if the Property Rights stated are Fee Simple, can a final value be reconciled to the Income Approach?

Thanks for the input.

 

[PropertyEconomics]

It is fee simple as best as I can tell ... the apartments are month-to-month and the majoirty of the building is owner occupied.

Im not sure how they can get "leased fee" out of that scenerio.

 

[sail143]

Under the occupancy you state this is Fee Simple. Income approach rents should be at market.

 

[PS111222333444]

Thanks for the input. I agree with both comments. I did apply market rent to the owner occupied space. I applied contract rent to the apartment units and then analyzed if they were bracketed by market comparables. I think the problem is I reconciled to the Income Approach to value, which insinuated a Leased Fee Interest to my higher ups.

 

[skx172]

in regard to reconciliation- if this is a type of property that would most likely trade to a owner user, emphasize the sales comp approach, if it will most likely trade to an investor go with the income approach. (assuming you did not run into any weak data in any of the approaches)

and yes this sounds like a fee simple as of the date of value, but in the valuation scenario you presume it becomes a leased fee (someone buys it and leases up the space)
report should label it fee simple

no reason not to reconcile a fee simple to the income approach just remember to deduct your lease-up costs (broker commission, downtime, concessions)

 

[Howard Klahr]

As previously noted by PE, no lease (long term), then it is not a leased fee. Unclear on why your supervisor/mentor insists that it is. You should have this conversation with them and then indicate their rationale. Maybe then we could assist in helping you to understand their intent (if rational).

I applied contract rent to the apartment units and then analyzed if they were bracketed by market comparables.

Assuming that the apartment leases are not longer than one-year, you should have applied market rent to all of the units. Especially if you were leaning toward a fee simple value.

no reason not to reconcile a fee simple to the income approach just remember to deduct your lease-up costs (broker commission, downtime, concessions)

This point however is entirely not correct for a market value analysis of an owner occupied property. You would only deduct these items if the space was vacant as of the valuation date to provide an "as is" value

 

[PropertyEconomics]

The property the OP has is very much a hybrid being commercial and residential ... partially owner occupied and partially tenant occupied.

I agree with Howard, there is no discount for lease up costs ... first the tenants are in place, second the owner is in place, and finally, the value method whether income or sales does not in and of itself determine leased fee or fee simple.

I am curious if an adjustment was made in the sales comparison approach based on the rental units of the apartments and whether that adjustment was derived from income analysis or sales analysis.

 

[skx172]

Why is a lease-up cost deduction wrong for a owner occupied property whose H&B use is for investor ownership.

a)
Most banks would want to see the lease-up cost deducted because they would want to know what would happen if they foreclose on the property which in all likelihood will occur contemporaneous with the loss of the occupying tenant

b)
but even for a non bank appraisal if a property is offered for sale that has a investor owner as the H&B use then the purchaser would have to factor in the cost/probability of getting the existing tenant into a market lease

realistically the lease with the owner/user would be negotiated as part of the sale and the owner would get more money if he signed a market rate lease versus if he sold the building without a lease negotiated up front.

As previously noted by PE, no lease (long term), then it is not a leased fee. Unclear on why your supervisor/mentor insists that it is. You should have this conversation with them and then indicate their rationale. Maybe then we could assist in helping you to understand their intent (if rational).



Assuming that the apartment leases are not longer than one-year, you should have applied market rent to all of the units. Especially if you were leaning toward a fee simple value.



This point however is entirely not correct for a market value analysis of an owner occupied property. You would only deduct these items if the space was vacant as of the valuation date to provide an "as is" value

 

[David Mescon]

Why is a lease-up cost deduction wrong for a owner occupied property whose H&B use is for investor ownership.

a)
Most banks would want to see the lease-up cost deducted because they would want to know what would happen if they foreclose on the property which in all likelihood will occur contemporaneous with the loss of the occupying tenant

b)
but even for a non bank appraisal if a property is offered for sale that has a investor owner as the H&B use then the purchaser would have to factor in the cost/probability of getting the existing tenant into a market lease

realistically the lease with the owner/user would be negotiated as part of the sale and the owner would get more money if he signed a market rate lease versus if he sold the building without a lease negotiated up front.

Although I'm not familiar with the subject's market, in the markets in which I have experience, this would likely be an owner-user property. Typically, with a combination of owner-user and a small number of month to month residential units, such properties tend to be owner managed. Without any mitigating circumstances, it is likely that all of the residential units would remain occupied throughout a foreclosure process, and, the larger space would be occupied by the new owner, hence, no lease-up costs or absorption analysis.

 

[John Glass]

Thanks for the input. I agree with both comments. I did apply market rent to the owner occupied space. I applied contract rent to the apartment units and then analyzed if they were bracketed by market comparables. I think the problem is I reconciled to the Income Approach to value, which insinuated a Leased Fee Interest to my higher ups.

The last sentence is troubling. The Income Approach and Leased Fee Interest are not synonamous.