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

[shaxton24]

As far as I can tell:

Appraisal Foundation or USPAP does not define "Fee Simple...". I word-searched the whole PDF of USPAP.

 

[leasedfee]

Yeah, USPAP got out of the definition business. They used to have a number of definitions but that probably just caused them grief.

Example: Land with utility/access easements, platting, required HOA's, required landscaped common areas, setbacks, etc.

I don't see any problem with Fee Simple defining this land. FS includes zoning-type rights being taken from an owner via police power resulting from local laws.

I don't either. I'd call it fee simple in my reports. I was just playing devil's advocate. . . .

As we appraise property rights, I've pushed my one employee to always ask for and look closer at title policies and get the important Exhibit B documents -- rather than just the wimpy "The appraiser did not receive. . ." boilerplate. Of course, sometimes you have to use the boiler plate. Even if a commitment or policy is several years old, it is better than nothing and it can have some nifty info or it can be a sigh of relief that it's pretty clean.

I should be working on this project where it took me a month just to get a land lease on an urban parking lot accompanying an improved property. The property owner had given me a lease where the property owner was paying the parking lot operator for the right to use some of their spaces! The title policy and Assessor both said that they owned it. It took a struggle to get them to realize that that didn't make sense. Turns out to be rider of sorts and everything fell into place once the original lease was gotten from the parking lot operator (tenant). ..... Gotta go get that report done now.....

 

[Ken B]

See USPAP FAQ 212.

 

[shaxton24]

Thanks Tim. Thats good info to know about title details!

I just found in my AI Advanced Cap coursebook where Vo is referred to as FS. Regarding the formula: Vo=LF+LH. But then on the same page it says the math isn't always equal. In other words, it is saying that it is an oversimplified theory/formula.

 

[Michael S]

Thanks Tim. Thats good info to know about title details!

I just found in my AI Advanced Cap coursebook where Vo is referred to as FS. Regarding the formula: Vo=LF+LH. But then on the same page it says the math isn't always equal. In other words, it is saying that it is an oversimplified theory/formula.

A tenant may have a lease at $30,000/year where the market rent is $50,000/year. A positive leasehold value exists in theory, but in practice if their lease has 3 months remaining, no one would every go through all the hassle of a sublease for that value to be recognized. Or their lease could have 20 years remaining but not allowing subleasing.

 

[shaxton24]

A tenant may have a lease at $30,000/year where the market rent is $50,000/year. A positive leasehold value exists in theory, but in practice if their lease has 3 months remaining, no one would every go through all the hassle of a sublease for that value to be recognized. Or their lease could have 20 years remaining but not allowing subleasing.

Very good points Michael! Esp about a lease not allowing subleasing. And good point that although there is a "value" there to the tenant, it may not be marketable.

I also just read in my AI coursebook where in the formula Vo=LF+LH, Vo is referred to as "Fee Simple" and as the overall "Property Value". So not only is this formula overly simple, it is just plain wrong. Vo is just a sum of two distinctly separate "values" and the LH may not even be a marketable value but an "investment value" of sorts only to the tenant. Too bad this has never been addressed or properly defined in the industry, because it leads to appraisal confusion.

 

[Ken B]

Around these parts, stop lights seem to create confusion. Especially for those wanting to turn right at the intersection. They like to race up on the light and then they seem surprised that there are actually people with a green light who seem to not realize that the person with the red light is in a hurry.

Sorry, but I think this horse is dead.

 

[Pittsburgh Pete]

Very good points Michael! Esp about a lease not allowing subleasing. And good point that although there is a "value" there to the tenant, it may not be marketable.

I also just read in my AI coursebook where in the formula Vo=LF+LH, Vo is referred to as "Fee Simple" and as the overall "Property Value". So not only is this formula overly simple, it is just plain wrong. Vo is just a sum of two distinctly separate "values" and the LH may not even be a marketable value but an "investment value" of sorts only to the tenant. Too bad this has never been addressed or properly defined in the industry, because it leads to appraisal confusion.

It is simplistic but generally true. If rents above market, leasehold interest would be a negative number; rents below market, leasehold would be a positive number. Marketability does enter into the reality but not necessarily the theoretical.