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

[leasedfee]

I was a very junior paperwork pusher. I wrote right-of-way easements for high-voltage electrical power lines, pipelines, and access roads. ..... Easement and lease agreements are a legal continuum of rights. They range from a wishy-washy gentleman's agreement on the "back of the napkin" at one-end to an iron clad conveyance of rights/interests. The wording and covenants matters.

(I just got off the phone with my employee. The broker said that office condo has 6 on-site parking spaces, in that same chic retail district where parking is pain in the neck.... We read through the condo docs and condo map that replatted the chain of title back in 1981. The CCRs clearly says "non-exclusive" parking. So the subject doesn't have a rentable/saleable property interest that can be traded by the condominium owner, but rather it is an first-come first-serve among the HOA members, though having an amenity value. )

Sometimes the iron clad easement or lease feels like the fee title was granted -- but the property still has the "twig" of ownership or name on the title in-spite having given away all the other branches from the bundle of rights. For tax, accounting, insurance, or legal reasons, the dominate (easement owner's) estate doesn't want to have the landowner's serviant position, and vice versa. The ownership or title to the estate is transferred to the current owner via the chain of title (deeds, etc.). Maybe someday it'll be reassembled.

Sometimes you'll hear a non-real estate person joke that "the bank owns my property" (not-talking about a foreclosure situation) when what they're technically saying is that the mortgage interests transferred by the deed of trust is so large and so dominate that they're only figuratively the title holder. I think this is what Jdbiggers is saying, that a very weak apartment contract keeps the bundle mostly intact except for a minimal right of use and occupancy. The leasee, easement owner, never takes title. The owner always is the most current link at the end of the chain of title, which started off originally from the monarch (in a non-republic) courtesy of the divine right of kings under God. Don't ask how Napoleon got title to sell the Louisiana Purchase or where the Native American Indian's fit into this.

 

[Ken B]

Ken,

But I don't know if you are in general agreement with me or not. But thats ok. Thanks for your comments.

Greater minds than mine don't agree on the subject. Only appraisers can find enjoyment in debating such topics over drinks at a cocktail reception. However, whenever my wife is suffering from insomnia, she simply asks me how my day went.

 

[shaxton24]

Ken,

I had to Google Occam's razor. Interesting. I like it.

..."The razor asserts that one should proceed to simpler theories until simplicity can be traded for greater explanatory power."

The way I analyze complex theory may be similar. ...Break it down to the building blocks, then build it back up. Its gotta make sense.

 

[shaxton24]

Thanks Tim. Now that was some complex analysis! I didn't realize that "twig" of ownership theatrics! Thanks for that.

 

[shaxton24]

Just because everybody else does it, doesn't mean its ok. Just because USPAP implies it is ok if our "peers" do it, doesn't mean its ok.

Would somebody please tell me how in Fee Simple estate the word "unencumbered" can include "KINDA encumbered". Like how 1 year leases or mo-to-mo leases are not really encumbering because they are ALMOST done.

Why rationalize "unencumbered" to also mean "kinda encumbered" in the Fee Simple estate. The definition is not squishy. Its clear. Fee Simple is unencumbered ownership with the only exceptions being gov't/police powers.

Then, because it is so strict, we appraisers need remedies for exceptions. The solution is clear in proper appraisal practice. When there are leases that are NOT otherwise excluded via Assumptions & Limiting Conditions, Extraordinary Assumptions, Hypothetical values, Prospective future values, etc., then its a Leased Fee Estate.

For example, an appraiser can simply make a hypothetical or extraordinary assumption that there are no leases on a property, and then value the Fee Simple estate.

So why go to all the trouble of muddying the clear definition of Fee Simple? This causes real valuation issues when the subject is not clearly defined.

 

[Ken B]

I don't know what is confusing about valuing a property's potential income at market rents versus valuing its actual income at contract rents. Neither market nor contract rent is hypothetical.

 

[shaxton24]

I don't know what is confusing about valuing a property's potential income at market rents versus valuing its actual income at contract rents. Neither market nor contract rent is hypothetical.

But what is confusing is valuing a leased property's Fee Simple estate, and not calling it a hypothetical value. The Fee Simple estate no longer exists; it changed to Leased Fee estate once under lease.

 

[Pittsburgh Pete]

Have for decades provided a fee simple value in conjunction with the leased fee value, and have never referred to it as hypothetical. The definitions of the estates (if clearly defined in the report) prevent this from being misleading (except to a total dolt--in such cases we would have to take greater care in the writing of the report).

Tenants default and move on all of the time--even quality ones. Lenders we work with are interested (and appreciate) knowing the impact that the existing leases have on the value of the leased fee vs. the fee simple.

Mountain out of molehill in my opinion.

 

[Ken B]

The very definition of market value asserts a hypothetical situation.

 

[Pittsburgh Pete]

Then there's that pesky SR 1-4(d) which requires an appraiser to "analyze the effect on value, if any, of the terms and conditions of the lease(s)." My method clearly addresses this requirement in greater detail than merely stating that the leases have a positive impact on value.