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Leasehold or Fee simple?
- Thread starter Mike Shapiro
- Start date
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Carnivore
Elite Member
- Joined
- Jan 15, 2002
- Professional Status
- Certified Residential Appraiser
- State
- North Carolina
About a year ago I received an assignment from Wachovia to appraise a SFR for a refi using the 1004 in Davidson, NC. The address placed it very close to Davidson College and so it raised my eyebrows almost immediately.
They guy borrowing the money claimed it was worth at least $349,000 because thats what he paid for it a year or two earlier.
He actually owned the building only. deed attached
Question:
1. What does he own?
2. What does the College Trustees own?
They guy borrowing the money claimed it was worth at least $349,000 because thats what he paid for it a year or two earlier.
He actually owned the building only. deed attached
Question:
1. What does he own?
2. What does the College Trustees own?
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Andrew Picarsic said:
The ownership of the building has been severed from the land and from the fee simple estate. The building is more in the nature of personal property if you are trying to appraise it.
In my opinion, the topic of property law is one that is wrongfully excluded from the Appraisal Foundation Body of Knowledge and general body of knowledge of real estate appraising. A critical concept in valuation is that titular "ownership" may be insignifcant and worthless, while control is significant and creates worth. Ownership with no control may well be worthless. Control over the rights, especially the right to use property is what makes an interest valuable. Value derives from controlling the rights, not 'owning" the dirt, sticks and bricks.
That's why my first response to what is the simplest way to look at the divided-control is to first figure out whether you ought to be appraising what the tenant controls versus what the fee holder (titual owner) controls.
Andrew,
I think some bad lawyering went into creating that deed. First, it says it grants a "fee simple" interest the "lot or parcel." Then the document says it doesn't grant interest in the land. :Eyecrazy:
That's why my first response to what is the simplest way to look at the divided-control is to first figure out whether you ought to be appraising what the tenant controls versus what the fee holder (titual owner) controls.
Andrew,
I think some bad lawyering went into creating that deed. First, it says it grants a "fee simple" interest the "lot or parcel." Then the document says it doesn't grant interest in the land. :Eyecrazy:
Steven Straka
Sophomore Member
- Joined
- May 12, 2006
- Professional Status
- Licensed Appraiser
Mike Shapiro said:
Simple answer:
Fee Simple = Freehold Estate - the most interest that can be held in real property.
Leasehold = Less than Freehold Estate - personal rights to the use of real property for a period of time. Examples include Estate for Years [Lease for Fixed Period of Time], Estate from period-to-period [Renewable Agreement to Rent], and Estate at Will [Rental Agreement that may be terminated at any time given X-day notice, depending on your State].
Sounds like you have an order for a fee simple assignment, unless the borrower has a life estate that's been granted to him/her/them. In such a case, the borrower is not the owner of record [depends on State], but does have the rights to collecting rent and and can finance the property during the duration of the life estate. The aforementioned would be a rare instance and there are a limited number of other examples that would prompt a "leasehold" assignment.
Joshua Fookes
Junior Member
- Joined
- Jan 15, 2003
- Professional Status
- Certified General Appraiser
- State
- California
JD Biggers has done more damage to this conversation than good.
Property Law is big part of what defines a Fee Simple interest from a Leased Fee interest.
In most commercial appraisals in my neck of the woods, if the tenants are on a month to month rent/lease, the owner is said to have Fee Simple interest.
IF the owner has leased the property to a tenant for any time longer than month-to-month, Then they have given the RIGHT OF USE AND OCCUPANCY away for a specified time frame. If they try to sell that property to someone else during the period of that lease, the new owner will have to honor that prior lease until the terms of that lease have been met.
The current owner and/or new owner WILL NOT BE ABLE TO USE OR OCCUPY that portion of the property. In effect THEY NO LONGER HAVE THE FEE SIMPLE INTEREST.
Laymen's Terms:
Fee Simple says, [BOLD] it's all yours [/BOLD] AND you can use it and go there as you see fit.
Leased Fee says, [BOLD] It's all yours [/BOLD] , BUT you have given the right to use it to someone else.
Lease Hold says, Thank you Mr. Landlord for giving me the right to use your property for the terms of our lease. Now that I have the right to USE AND OCCUPY what you own, I can sell that right to someone else. Value is created in the lease hold interest if the lease is considered to be "below market rent".
Example: I own a house with no tenant (Fee Simple). I lease it to a friend for 5 years at $1,000/month. I have given the right of USE and OCCUPANCY to my friend. I now possess the Leased Fee interest in the property, and my friend now possess a Lease Hold interest in the property. After two years, the market rent for my house goes up to $1,500/month. I cannot go in and kick out my friend or raise his rent. I have given up that right (this is why lease terms are so important). When this is the case, it is possible that the Lease Hold interest now has some sort of value. He could possibly sell the right to use and occupy the property to someone else. For example, he rents it to a family for $1,500/month for 3 years. His Lease Hold interest allowed him to earn 500/month off my property. I still own the property, but because of the lease, I lost certain rights.
Now lets say I want to sell my house while it is under this lease? Would a buyer purchase it for market value if it was leased to someone at below market rents? Not if they were an investor. That is only one reason why it is important to properly identify the Interest being appraised.
THE RIGHT OF USE AND OCCUPANCY is defendable based upon Contract Law in the state of CA.
Property Law is big part of what defines a Fee Simple interest from a Leased Fee interest.
In most commercial appraisals in my neck of the woods, if the tenants are on a month to month rent/lease, the owner is said to have Fee Simple interest.
IF the owner has leased the property to a tenant for any time longer than month-to-month, Then they have given the RIGHT OF USE AND OCCUPANCY away for a specified time frame. If they try to sell that property to someone else during the period of that lease, the new owner will have to honor that prior lease until the terms of that lease have been met.
The current owner and/or new owner WILL NOT BE ABLE TO USE OR OCCUPY that portion of the property. In effect THEY NO LONGER HAVE THE FEE SIMPLE INTEREST.
Laymen's Terms:
Fee Simple says, [BOLD] it's all yours [/BOLD] AND you can use it and go there as you see fit.
Leased Fee says, [BOLD] It's all yours [/BOLD] , BUT you have given the right to use it to someone else.
Lease Hold says, Thank you Mr. Landlord for giving me the right to use your property for the terms of our lease. Now that I have the right to USE AND OCCUPY what you own, I can sell that right to someone else. Value is created in the lease hold interest if the lease is considered to be "below market rent".
Example: I own a house with no tenant (Fee Simple). I lease it to a friend for 5 years at $1,000/month. I have given the right of USE and OCCUPANCY to my friend. I now possess the Leased Fee interest in the property, and my friend now possess a Lease Hold interest in the property. After two years, the market rent for my house goes up to $1,500/month. I cannot go in and kick out my friend or raise his rent. I have given up that right (this is why lease terms are so important). When this is the case, it is possible that the Lease Hold interest now has some sort of value. He could possibly sell the right to use and occupy the property to someone else. For example, he rents it to a family for $1,500/month for 3 years. His Lease Hold interest allowed him to earn 500/month off my property. I still own the property, but because of the lease, I lost certain rights.
Now lets say I want to sell my house while it is under this lease? Would a buyer purchase it for market value if it was leased to someone at below market rents? Not if they were an investor. That is only one reason why it is important to properly identify the Interest being appraised.
THE RIGHT OF USE AND OCCUPANCY is defendable based upon Contract Law in the state of CA.
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