Leased fee or fee simple?

[Gobears81]

I am appraising a property that is being purchased for a certain amount, but the buyer is required to pay additional monthly payments to the seller for several months. The client is adding those payments to the initial outlay to determine the effective price.

The sales contract refers to these payments as additional rent, and the buyer is the current tenant. But, the buyer would own the property outright after the initial outlay (what binds them to paying after, not sure). For that reason, this would not be a CFD, nor is that mentioned in the contract.

Adding the monthly payments to the initial outlay results in a market-oriented price. I could just appraise this property fee simple and treat the additional payments as a sale condition, though my logic feels a bit flimsy no matter which direction to take, so wanted to get some other thoughts here (ie is this leased fee and would the sale conditions impact the valuation)?

 

[TerryRohrer]

I can't imagine that is typical. Short of that, any possible impact is entirely theoretical. I would explain that in the contract analysis and just value the fee simple. Surely, the difference is negligible and knowing it won't benefit the lender.

 

[Zoe]

My thought is your value definition is MV. With a MV definition and fee simple interests as of effective date, you would use market rent. If you use contract rent, then you would use leased fee or leasehold interests for the buyer. I don't know who your client is. Is it a lender?

You could do fee simple and discount or add any difference between market rent and contract rent. Not impossible.

 

[sputnam]

The type of value is part of identifying the problem and that requires some conversation with your Client. Just ask them whether they want the value of the fee simple interest, the leased fee, the leasehold, something else, or all of the above.

 

[Zoe]

If they want leased fee or lease hold on MV definition, then that is fine as of effective date. If they want fee simple as of effective date and MV definition, you will have to determine leased fee interest or leasehold interest relative to MV definition.

How many months left on this lease relative to your market rent estimate?

Fee simple may be simplest.

You may already have a clue on contract rent vs market rent. I don't know. But that is where leased fee and Lease hold interests get involved with MV definition as of the effective date.

You can't ignore the lease interests that is in the sales contract.

 

[Gobears81]

If they want leased fee or lease hold on MV definition, then that is fine as of effective date. If they want fee simple as of effective date and MV definition, you will have to determine leased fee interest or leasehold interest relative to MV definition.

How many months left on this lease relative to your market rent estimate?

There's two issues if I go the leased fee route: First is that they are getting a "below market" price to start, then having to pay rent for several months after they take ownership. So a positive outlay followed by several small negative outlays. The second issue is that the "lessor" is no longer the owner, which is certainly atypical.

I'm leaning towards recognizing this as a sale condition and going the fee simple route, which would be more consistent with how the client is viewing it.

 

[Zoe]

Give you an example. When somebody values a new Walgreen's drug store, they value the lease predominantly. Maybe a 25 year lease.

 

[Zoe]

There's two issues if I go the leased fee route: First is that they are getting a "below market" price to start, then having to pay rent for several months after they take ownership. So a positive outlay followed by several small negative outlays. The second issue is that the "lessor" is no longer the owner, which is certainly atypical.

I'm leaning towards recognizing this as a sale condition and going the fee simple route, which would be more consistent with how the client is viewing it.

Do you have to do sales comp too? You can balance all that in final reconciliation.

 

[Zoe]

Okay, what are terms to exit the lease?

 

[Gobears81]

Okay, what are terms to exit the lease?

I suppose they pay the remainder upfront, rather than periodically. Or, terminate the sales contract.

The issue is whether this is actually a lease. Looking up the definition of lease in the Dictionary of RE Appraisal:

"A contract in which the rights to use
and occupy land, space, or structures are
transferred by the owner to another for
a specified period of time in return for a
specified rent."

Key word in the above is owner. If the buyer is taking ownership, they have the full bundle of rights attached, so they would not have to pay rent for the right to use. The more that I think about it, the more that I think that rent payments are not the appropriate term here.