Why do appraisers say Leased Fee Value = Fee Simple Value, when leases are at market?

[shaxton24]

Doesn’t Fee Simple assume a property is vacant or owner-occupied? The definition of Fee Simple explicitly says “unencumbered”. Therefore, a leased building cannot be Fee Simple ownership.

Since a lease encumbers a property - Fee Simple cannot portray a 20-tenant retail building that is leased at market. Furthermore, a 20-space retail building that is vacant is worth much less than if filled with tenants.

 

[Michigan CG]

If a building is leased at market rents then the Leased Fee Interest and the Fee Simple Interest should be the same, or close in value.

 

[Terrel L. Shields]

The appraiser values the real estate interest requested. And Mich said it right. If the leases are below market (what should be leased for as opposed to what they actually lease for) - especially long term - then fee simple may be different

 

[The Warrior Monk]

Doesn’t Fee Simple assume a property is vacant or owner-occupied? The definition of Fee Simple explicitly says “unencumbered”. Therefore, a leased building cannot be Fee Simple ownership.

The owner of a Fee Simple or Leased Fee Interest has fee title. It is true that these estates are different, and can have different value.

Since a lease encumbers a property - Fee Simple cannot portray a 20-tenant retail building that is leased at market. Furthermore, a 20-space retail building that is vacant is worth much less than if filled with tenants.

This could be true. It may also be true that a single-unit property (typically purchased by the owner occupant) that is leased may be worth much less than if vacant. In some markets this is so dramatic that the market rent won't even cover the carrying costs.

Fee simple and leased fee estates can have similar value under certain circumstances. A common example I see is with, say, single-unit industrial properties, which are purchased by both the owner occupant and the investor.

The relationship in value between these estates will vary by market.

 

[Ken B]

And yet, the fee simple interest in fully leased multi-tenant properties transfers all the time, subject to various other interests, some of which may be the leases encumbering the property. The reality is that there are few owners of real property which have complete ownership of the entire bundle of rights associated with that property.

No one questions valuation of the fee simple interest in owner-user properties, even though there may be numerous encumberances on the title, such as a mortgage or liens of various types.

 

[ETex2]

In other words, saying that the value is the same doesn't imply an incorrect ownership interest.

 

[shaxton24]

When valuing the Fee Simple interest of this 20-tenant retail property, you are valuing it as if vacant (even when owner occupied). Fee simple interest, by definition, cannot be encumbered by leases. It doesn't matter where the rents are - above, below, or at market.

Its simple.
Fee Simple - no leases.
Leased Fee - leases.

 

[leasedfee]

Doesn’t Fee Simple assume a property is vacant or owner-occupied?

Fee simple doesn't make any assumptions. It is the owner's legal status of the property rights.

Therefore, a leased building cannot be Fee Simple ownership.

Correct. ... However, if the leases are very short, commonly one year or less in commercial appraisals, or the leases can be easily revoked at the landlord's choosing (i.e., the owner can get to full unencumbered use), then it can be considered a fee simple ownership.

Since a lease encumbers a property - Fee Simple cannot portray a 20-tenant retail building that is leased at market. Furthermore, a 20-space retail building that is vacant is worth much less than if filled with tenants.

This example is a question of modeling of cash flows as it pertains to a particular property type at its highest & best use. The value of a fully occupied 20 bay building may very well (depending on the location, quality, etc., etc.) be worth more than an unoccupied building.

Starbucks could occupy a building month-to-month or say 6 months giving the owner FS -- and neither party desires to change the occupancy. Starbucks could occupy the same building but with a 50 year lease tying up the property rights. The values might be the same or different depending on the market conditions and market area.

We get into issues of H&BU and the reversion of the property. Maybe the vacant 20 bay crappy retail is more valuable because you can now build a skyscraper or assemble into a regional mall. Pity the poor landlord across the street with an identical 20 bay crappy retail center with 20 tenants on very long-term leases. The FS, here, clearly is far more valuable than the LF.

Other property types like churches or smaller buildings may be different. Property types could be occupied reasonably quickly might not suffer such discounting. Leased fee at market rents does not necessarily equal fee simple as you illustrate. With simpler properties leased fee at market rents can be equivalent to the economic rents that would be paid for fee simple property rights. ("Economic rent" is the factor costs or opportunity cost that would be paid for a resource.) Sometimes clients want the hypothetical fee simple value because leased properties can sometimes be far higher than the fee simple rents. Blockbuster which had a semi-monopoly on the VHS, um DVD, in the movie market, were paying above market rents, at least in my area when compared to what a weaker brand or non-national credit tenant would pay. This put banks (and the investors who paid above-market prices for that leased property) at risk should it go dark.

 

[Ken B]

When valuing the Fee Simple interest of this 20-tenant retail property, you are valuing it as if vacant (even when owner occupied). Fee simple interest, by definition, cannot be encumbered by leases. It doesn't matter where the rents are - above, below, or at market.

Its simple.
Fee Simple - no leases.
Leased Fee - leases.

So if a property is leased, how would one appraise the value of the fee simple interest for assessment purposes?

This is what Florida has to say about the subject:

15.5 Market Rent and Fee Simple Estate. Market rent, which is distinct from
contract rent, is the most likely rent that an income-producing property would
command if offered for lease on the open market, as of the date of appraisal. Fee
simple estate is the unencumbered ownership of real property limited only by the four
powers of government: taxation, police power, eminent domain, and escheat. Unless
specified otherwise, fee simple estate is the interest in real property to be appraised
for ad valorem tax purposes in the State of Florida.56 Market rent corresponds to the
fee simple estate. Contract rent is the rent due under the terms of an existing lease
agreement for real property, and contract rent corresponds to the leased fee estate.
Therefore, contract rent is irrelevant to real property appraisal for ad valorem tax
purposes in the State of Florida, unless independent support is available indicating
that contract rent is equal to market rent. Market rent may be less than, equal to, or
greater than contract rent.

 

[Ken B]

You know, I once had a loan officer scream at me so loudly and emphatically that "AN ACRE IS 40,000 SQUARE FEET!!!, that, for the briefest split second, I actually questioned myself.

To this day, an acre is 43,560 SF and valuation of the fee simple interest in property with encumberances not related to the four police powers is performed daily. Sometimes those encumberances are related to leases; some of those are even long-term.