Leasehold Versus Fee Simple Adjustments

[timd354]

An appraisal of a leasehold is an appraisal of personal property, an appraisal of a lease contract, not an appraisal of real estate!

Webbed, while I agree with much of what you have to say on this issue, the above statement is completely incorrect. A leasehold interest in real property is not personal property at all, but is an interest in real property. Granted, it is not an interest in the entire freehold estate, but it is nevertheless an interest in real property. That's why, in Maryland at least, long term leaseholds are filed in the land records, are subject to real estate taxes, transfer taxes and deed stamps when the lessee's interest transferred, and are able to serve as collateral for mortgage with the IRS allowing the leasehold lessee to deduct the interest on such a mortgage just like any other homeowner.

Think about it Webbed....you cannot pick up an move a real property leasehold and take it with you like you can with a chattel.....the leasehold is inexerably tied with and a part of a particular piece of real property and cannot be separated from it as without an interest in a particular piece of real property, a real property leasehold simply would cease to exist.

Additionally, regarding your assertion that the income approach is the only way or the best way to appraise a leasehold, I think you are confused as to what the OP is being asked to appraise (although his post is confusing). While the income approach would certainly likely be they best approach to appraise the leasehold lessor's interest, the OP is being asked to appraise the lessee's interest and I can tell you from experience in doing probably hundreds of residential leasehold appraisals, that the income approach is rarely the best approach or even of any value whatsoever in the appraisal of the lessee's interest in a residential leasehold.

 

[SmilingDog]

Thanks everyone for your input, comments and debates.

My apologies for not providing all the relevant information, I wanted to get a general idea or question. I also did not want to divulge too much information.

However, thank you all for your spirited debate and comments. I have the necessary information with which to make a decision.

 

[Webbed Feet]

I am correct as per BL6, p. 1217

Timd,

I appreciate your intellectual position trying to tie a contract to a specific piece of real estate to say a leasehold estate is not personal property. But I tend to think much of the legal world does not agree with you however....

Consistently the owner of a leasehold estate is always referred to as a “Tenant” with the owner of the Leased Fee always referred to as the landlord. Lessee = Tenant.. Lessor = Landlord. The tenant is never referred to as the owner of the “property” (when so used generally meaning real estate or "real property.") The tenant always pays “rent.” The tenant does not have title to the property. The tenants only rights are contractual rights, not title rights. So off we go to support for my views and lifting you out of the water via some explosive device....

http://www.wilkes-nc-real-estate.com/002.php

Let's go to the above article that is specifically referencing Black's Law.

I quote from paragraph ten defining "Property: (personal property)," .... "a right or interest less than a freehold in realty......." Question: Is a leasehold estate a Freehold Estate? Answer: No, a leasehold is a "Less Than Freehold Estate." Conclusion: I am correct, a leasehold estate is personal property. I am correct as per BL6, p. 1217

I quote from paragraph eighteen. "Interest:" ... "INTEREST cannot be TITLE, since it is less than title." From BL6, p.812

From Paragraph twenty-one. "OWN" ... - "To 'own' is to have title. An interest is LESS THAN TITLE." BL6,p.1105

Paragraph twenty-four. ... "However, since an interest in leased land is not automatically transferable and is NOT Real Estate.............."


Anyway, I think you get my point by now..... Still think I am wrong?



http://en.wikipedia.org/wiki/Leasehold_estate

http://realestate.about.com/od/jl/g/leasehold_estat.htm

http://legal-dictionary.thefreedictionary.com/Leasehold+estate

http://encyclopedia2.thefreedictionary.com/Leasehold+estate

http://encyclopedia.farlex.com/Leasehold+estate

http://realestate.about.com/od/jl/p/leasehold_estat.htm

http://www.answers.com/topic/leasehold-estate

http://www.osman1.com/leashold.html

This last link is especially interesting as in concludes with how to appraise a lease fee ownership.

[FONT=Arial, sans-serif]Leased Fee. "An ownership interest held by a landlord with the rights of use and occupancy [/FONT][FONT=Arial, sans-serif]conveyed by lease to others. The rights of the lessor (the leased fee owner) and the lessee are [/FONT][FONT=Arial, sans-serif]specified [/FONT][FONT=Arial, sans-serif]by contract terms[/FONT][FONT=Arial, sans-serif] contained within the lease." [/FONT][FONT=Arial, sans-serif]Dictionary of Real Estate Appraisal[/FONT][FONT=Arial, sans-serif], page 161.[/FONT]​

Please note the rights are not specified by title, but by contract terms. The problem you are having is coming from the definition of “Estate.” Yes, the term “Estate” normally refers to an ownership interest a person has in real property. The two main things are an estate ownership is measured by duration and an interest that is, or will become, possessory. I know you are thinking that an interest in real property would mean that obtaining it via a lease must mean it is not personal property because there is an “interest in real property.” But somewhere someone side tracked you on this by not focusing on how that interest was obtained or defining what that "Interest" really was. Because the leasehold is created by a contract, not by title or deed, and a lease is a contract, the provisions of the lease will be interpreted under contract law, not real estate law. Because, as it is a contract right, the leasehold estate is treated as the personal property (personalty) of the tenant and it is classified as chattel real, that is a personal property interest that attaches to real estate.

Chattel Real: "Personal property that which is closely associated with real property, such as a lease"

Chattel: "Personal property and property other than real estate"

If your view were correct, there would be no tenant, and the owner of the leasehold could transfer their ownership interest via title or deed. They cannot, because they cannot sell what they don't own, and they don't own by title or deed. Those rights are owned by the landlord / lessor. They only own a right of possession via a contract. What your local jurisdictions, or the IRS, are doing in order to collect taxes is beside the point. Many forms of personal property are taxed. And a powerful real estate lobby successful at getting a tax write off doesn't make it title ownership either. Nor does being able to mortgage personal property rights, nor does recording publicly just to ensure public notice to put an end to real estate or mortgage fraud.

But I suppose Maryland can be an odd duck out and just be strange...

 

[PropertyEconomics]

Webbed ... I believe in MANY MANY leasehold properties, the leasehold estate is an interest in Realty ... a property right interest. I would not think it automatically personal property .... just my thought. Most of your recitals would tend to agree with this stance.

 

[Webbed Feet]

P.E.

Sigh.... P.E. .. If a fisherman has a permanent right to cross lot A, owned by a hunter, to fish in the stream, does the fisherman have an interest in lot A and does that mean he owns that interest as real estate?

I think my recitals agree with my stance, not a stance that a lease with interests in realty = real estate. The leased fee owner still "owns" all the interests, those interests have been contracted for the use of them for a specified period of time, not the sale of them indefinitely.