Leased Fee or Fee Simple - That is the Question

[Roger Murdock]

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.

So....it's a shooting range, then?

 

[leasedfee]

The poster's next sentence is key.

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 owner or perspective buyer has all of the sticks in the bundle of rights. If there was a couple of leases with noteworthy duration on their leasehold, then you can't demolish the building. You could condominiumize but there'd be leasehold on one or more units, which may have a positive or a negative leasehold value. You can't modify/convert those suites/bays; as you've given the right of use/possession, control, privacy, quiet enjoyment to the leasee, as governed by the lease and law. Depending on the agreement, the right to rent (e.g., an exclusivity clause, or sub-lease) or the right to mortgage the property may be given up by the leasor; though this is less common. In return, the leasor receives contract rent.

At that point, IMO it would be appropriate to call the entire bundle of rights a leased fee value, rather splitting further hairs of the extent or percent of the estate encumbered.

 

[ETex2]

"fee simple subject to the existing leases". I've used this term for years and have never had anyone question it or disagree with it when used in my reports.

 

[Roger Murdock]

My MAI mentor elaborated on his position and the responses from this forum that I sent to him:
"My opinion is that if the property is an investment property, developed for multi-use and multitenant occupancy. The property was developed for investment return, and the income approach is most applicable in these situations. The length of the lease seems immaterial to me. Without leases the building would have no income. The fact that this owner has no leases in place is simply poor management. He is the sole owner of the building but a part owner of the business. He should have a lease with the accounting company. He should have lease agreements with the apartment tenants. We need to assume competent management would encumber this property with leases. I don’t agree with many of the comments (from the forum)."

Sad to say it, but this just comes to show that not all MAIs are created equal. Your mentor is simply wrong on this. No leases = fee simple. The only way to get this to be leased fee is to incorporate a hypothetical condition involving at least one of the tenants having a lease. However, it would be improper to use such a hypothetical condition, as I cannot imagine a circumstance under which it would actually be necessary to produce a credible value opinion.

 

[Roger Murdock]

"fee simple subject to the existing leases". I've used this term for years and have never had anyone question it or disagree with it when used in my reports.

With all due respect, your expression either meaningless, or a contradiction in terms (depending on how one looks at it). It makes as much sense as saying "leased fee disregarding all existing leases".

 

[Michael S]

With all due respect, your expression either meaningless, or a contradiction in terms (depending on how one looks at it). It makes as much sense as saying "leased fee disregarding all existing leases".

We had a client who engaged us to appraise an apartment complex for Freddie Mac financing. One of their requirements was we label the interest being appraised as "fee simple subject to short term leases". I suppose it's as good as anything else. Generally we label apartments as fee simple but I can certainly see calling it leased fee since without the leases (even month to month) in place the property is worth substantially less due to lease up costs.

 

[BRCJR]

We had a client who engaged us to appraise an apartment complex for Freddie Mac financing. One of their requirements was we label the interest being appraised as "fee simple subject to short term leases". I suppose it's as good as anything else. Generally we label apartments as fee simple but I can certainly see calling it leased fee since without the leases (even month to month) in place the property is worth substantially less due to lease up costs.

What are you calling an apartment complex?

 

[ETex2]

With all due respect, your expression either meaningless, or a contradiction in terms (depending on how one looks at it). It makes as much sense as saying "leased fee disregarding all existing leases".

I learned that many years ago while working as a senior staff appraiser at a large shop owned by a couple of MAI's. Even brought it up at an Institute class once, and the instructor said it was acceptable as well. And I've done work for 3 different MAI's over the last few years who use the same verbage. Of course all 4 of us have been doing this for over 25 years each, so maybe we're just old school.

But I guess it COULD be wrong, right?

And you are implying that this phrase - "fee simple subject to the short term leases in place", as used in post #17 of this thread, is also incorrect?

 

[Michael S]

What are you calling an apartment complex?

200-300 units.

 

[leasedfee]

@ ETex2. I believe that over the decades there has been a national attempt to standardize the nomenclature.
E.g., sometimes called the market approach and direct sales comparison --> sales comparison approach.
E.g., once called economic obsolescence or external obsolescence --> external obsolescence.