Leasehold or Fee simple?

[jdbiggers]

The rest of your post does not clarify the difference between "technically" and "really."

First, I must address another comment about "the owner has released a potion of the bundle of rights" comment made. NO, THEY HAVEN'T: THEY HAVE LEASED A PORTION, THEY HAVE NOT DEEDED OWNERSHIP TO THOSE RIGHTS. Big difference. Just because I let you use my bathroom doesn't mean you OWN my toilet. A lease is just a legal definition of "I'm letting you use my bathroom for this price;" it is NOT saying: "I grant you all the power and rights of ownership."

As for the "technically/not really" issue, it is NOT a Leashold Estate by ANY means. However, in certain rent controlled areas or in cases of favorable lease agreements, people do TRADE the values of leases where sub-letting is permitted. And, it is possible to place a value on that. However, THAT IS PERSONAL PROPERTY, NOT REAL PROPERTY.

So, technically, an appraiser CAN value the lease, but it is NOT real property.

For instance, many years ago my uncle had a 1M SqFt wharehouse in a protected district in White Plains, New York. His lease was only $500 per month, with a contract from a friend that stated rent would not increase more than 5% every OTHER year (meaning 2.3% annually adjusted). He was getting old and retiring, but had 10 more years on this lease with rights to sub-let. He hired appraisers AND CPA's to determine the VALUE to "sell" (sub-let) his lease. Can you imagine the value to a company to be able to lease prime wharehouse space for only $500 per month? So, as part of his company operations, he sold his business, which was worthless without the lease since he had no more inventory, no staff, and no production, for a high price based on the VALUE of the lease and how much it could save the BUYING company trying to lease a similar property. At the time, a similar wharehouse would have run about $12,000 per month, so a company would pay a premium to be able to rent for $500 and dollar cost average including that premium. So, in this case, they paid my uncle a little over $900,000, which still saved the company an average of $54,000 per year AFTER paying the $900k for that 10 year lease. He split the money with his friend who had originally leased the property to him. It was PERSONAL property, NOT real property that was valued.

LEASEHOLD is a form of ownership with a revertionary clause. A conventional "lease" is a LICENSE to USE certain aspects of the bundle of rights BY the OWNER. It does NOT convey those rights, but grants USE of them. It's kind of like buying a Burger King franchise: you do NOT OWN the Burger King rights but are just granted a license to use the name. Personally, I prefer my bathroom analogy above. Rights of Use and Rights of Ownership are two distinct things, even generally governed by different laws.

If I remember, the "big red book" or appraiser's "Bible" from the AI had a pretty good section on this. It's been years since I reread it. If I find my book, I'll see if I can find the pages. But, I'm sure many of you keep it on hand and can find it (if you don't have "the Appraisal of Real Estate" from the AI, GET ONE!!! Everything you would ever want to know about appraisal is in there which is why many call it the "Bible").

JD

 

[jdbiggers]

Funny story, though

Regarding "automaticlaly renewable leashold estates."

For some 60 years, a certain Indian tribe in Maricopa County, Arizona had "automatically renewed" 10 year leases on a certain tract of land. A developer of high-end ($300k +) spec homes decides to buyer a few acres and build some luxury homes, which he does. There were plans for 20 houses, but he built and sold 8 and had 2 more in the works.

The tribe started to see how "nice" the area had become and decided NOT to renew the leases, thinking, guess what, we now own all these homes, including these new luxury homes.

Two days before the lease estates expired, and after months of having their lawyers try to convince the tribe to renew, many of the owners, including ALL of the luxury home owners, razed their homes.

I don't know if this story is true since it supposedly happened in the mid 1970's, but it is legally feasible for this to occur. We have a complete shopping mall here in Tucson that is about to have it's leashold estate revert to the original grantor, who wants the property, including the shopping mall and all it's rental income.

JD

 

[Fred]

As for the "technically/not really" issue, it is NOT a Leashold Estate by ANY means.

So technically it is, but not really - has become – not by any means. So, technically it is, but it isn’t?

Another reason your posts are confusing is the word, “it.” Once there is lease, there are two “its:” the landlord’s interest and the tenant’s interest. Each interest has a value (positive, negative or virtually zero). So, each time you use the singular, “it,” I can’t tell what “it” you are referring to. I think there is a consensus that the landlord's interest is not a leasehold estate. If you are saying the tenant’s interest in real estate is not a leasehold interest, then, praytell what does one call it?

If I remember, the "big red book" or appraiser's "Bible" from the AI

That is a beginner’s book, but it does refer to the tenant’s interest as a leasehold interest.

 

[jdbiggers]

So technically it is, but not really - has become – not by any means. So, technically it is, but it isn’t?

Another reason your posts are confusing is the word, “it.” Once there is lease, there are two “its:” the landlord’s interest and the tenant’s interest. Each interest has a value (positive, negative or virtually zero). So, each time you use the singular, “it,” I can’t tell what “it” you are referring to. I think there is a consensus that the landlord's interest is not a leasehold estate. If you are saying the tenant’s interest in real estate is not a leasehold interest, then, praytell what does one call it?

That is a beginner’s book, but it does refer to the tenant’s interest as a leasehold interest.

No, it does NOT refer to a tenants interest in a conventional LEASE as a leasehold interest. I found my book. It is VERY CLEAR on the matter, and it is NOT only NOT a "beginner's book," but is one that is very in depth and obviously one you and every appraiser should read, though most do. Everything about appraisal from A to Z is covered, so that's like calling the most current encyclopedias "a beginner's book." Every situation, even though it may seem different, is covered and covered very well and in depth.

"It", from the perspective of a tenant, is rights granted under OTHER laws, not those which cover real property. There are separate statutes and laws which deal with tenant rights, such as the Landlord Tenant Acts which most states have: these set the "rights" of a tenant, but NONE of those rights refer to the tenant having "ownership," which a LEashold Interest is a form of. The statutes which deal with REAL PROPERTY deal with Leasehold Estates. Different animals entirely, and I can't see how anyone could be confused.

Let's not play a Clinton card here with the "it," and the plural of "it" in this context would be "they." Since the tenant has no ownership rights, there is no "it" for the tenant. The only "it" is the ownership of the OWNER. The tenat has rights under laws, but NOT laws of property rights.

The context of "it" is clearly "it," the tenants lease, NOT leashold interest. Furthermore, the rights of a Fee Simple interest include the ability to lease a property, so the landlord's interest in a fee simple estate he or she owns could bever be "Leashold." Again, granting someone USE is NOT granting them OWNERSHIP. Imagine how screwed landlord's would be if that were the case.

JD

 

[Mark K]

First, I must address another comment about "the owner has released a potion of the bundle of rights" comment made. NO, THEY HAVEN'T: THEY HAVE LEASED A PORTION, THEY HAVE NOT DEEDED OWNERSHIP TO THOSE RIGHTS. Big difference. Just because I let you use my bathroom doesn't mean you OWN my toilet. A lease is just a legal definition of "I'm letting you use my bathroom for this price;" it is NOT saying: "I grant you all the power and rights of ownership."


JD

Letting someone use something is different than signing a lease for a specific term.

Lease me your bathroom (to follow your example) for a year and then try to sell your house. You and/or the new owner could be SOL, so to speak.

A lease conevys a legally recognized interest in the real estate with a result of the owner retaining less than fee simple interest. The tenants interest is the leasehold, the owner's is leased fee.

Ignore them if you chose, but those are the facts.

Happy New Year, all.

 

[xm72mhd]

Big difference. Just because I let you use my bathroom doesn't mean you OWN my toilet.

Well, yeah it is a big difference, but most people are interested in use even more than the reversion, so don't forget the landlord can't use that toilet during the period of time the tenant has it legally in his possession. The landlord will have to go elsewhere unless the contract says otherwise.

There is also a big difference between allowing someone to use your toilet and delivering them possession of it.

 

[Joanne Rauenzahn]

In underwriting, I always considered a leasehold estate to be when the LAND is leased. I knew of an island off of Long Island that had leased land (Fire Island I think is the name)

 

[The Warrior Monk]

In underwriting, I always considered a leasehold estate to be when the LAND is leased. I knew of an island off of Long Island that had leased land (Fire Island I think is the name)

There are several here. Most properties on Fire Island are fee simple. However, there are some communities (notably Point of Woods) and scattered homes that are on leased land. There are also a few islands out in the bay that have leases that are 99 years or so; one of my appraiser associates has one.

I believe Fannie's interpretation of leasehold is the situation you described above, which is the only one they are interested in. They're certainly not going to lend on leasehold interests in the broader sense.

 

[moh malekpour]

To me the simplest answer is that it depnds on whether you are appraising the tenant's interest (leasehold) or the fee holder's interest (fee simple).

This is the correct answer and usually is for commercial properties. Some one leases the whole shopping center and sub lease it to others for higher fees, that lease has value and can be appraised for the tenant but a renter of house can hardly sub lease it, so how that rent can be appraised unless some one has a long term below market rent and so, the different can be capitalized like in areas with rent control but it is not even considered an income.
The fee simple owner of home who rents a home doesn’t transfer the deed, just gives a temporary right to the tenant to use the property. The fee simple remains the still the fee simple but the owner is obligated to stick with the lease contract. In residential, the lease is usually month-by-month, so it is easy for the owner to give the tenant a notice a month in advance and cancel that tenant rights. If the lease is yearly lease, then the owner has to wait for the rent termination but I don’t think any residential tenant ever wants to value the lease fee because a monthly lease doesn’t have that much value

 

[xm72mhd]

In underwriting, I always considered a leasehold estate to be when the LAND is leased. I knew of an island off of Long Island that had leased land (Fire Island I think is the name)

Well this might become interestng. Since we are dealing with real property interests in appraising and not just real estate, why is it that you would not consider a leasehold estate in some interest other than the land?