Fee Simple Estate vs. Leased Fee Estate

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Fee Simple Estate vs. Leased Fee Estate

Valuation Management Group’s Real Estate Appraisal Reviewers often encounter what appears to be a common misunderstanding about which portion of an estate should be valued when a client and/or intended user request an appraisal report: the Fee Simple Estate or the Leased Fee Estate. Based upon the definitions from the Dictionary of Real Estate Appraisal (below), anytime the subject is encumbered by a lease, including partial lease, short-term lease on a single family residence, a ground lease, or billboard lease, the leased fee property rights must be valued. In the development and analysis for the Income Approach to Value, an appraiser may find that the lease terms are in line with current market conditions, and therefore, the value of the leased fee estate is equal to the fee simple estate, but the property rights appraised and market value label should be leased fee estate for technical accuracy and consistency with appraisal industry standards and practice. Conversely, if the market rent is found to be greater or less than the contract rent, a leasehold estate exists in which the tenant holds positive leasehold or a negative leasehold position.

Many times, an appraisal is ordered for a property that is tenant occupied, but a client wants to specifically know the “fee simple” market value as if the lease were not in place. This can be performed as an additional value scenario and under the proper hypothetical condition that the lease does not exist (when that is contrary to fact). Since Interagency Appraisal and Evaluation Guidelines require an “as is value” free of any hypothetical conditions, the market value of the leased fee estate should be reported as an “as is” value, in addition to the hypothetical value of the fee simple estate “as though unencumbered”.

Fee Simple Estate – Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

Leased Fee Estate – The ownership interest that the landlord or lessor maintains in a property under a lease with the rights of use and occupancy being conveyed or granted to a tenant or lessee. The ownership interest in a leased property.

Leasehold Estate – The interest which a tenant or lessee acquires under a lease including rights of use and occupancy for a stated term under certain conditions.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

Valuation Management Group makes every attempt to obtain all pertinent information for an assignment before engaging an appraiser, and we strive to make sure client personnel are knowledgeable as well. We are sensitive to and understand compliance issues and information necessary for credit decisions in all disciplines of appraisal. Discussion of this topic is another way Valuation Management Group is attempting to improve mutual understanding and communication between a client, appraiser, and Valuation Management Group staff members so we all operate in an effective and fully-informed environment.

Valuation Management Group is a national, full service appraisal management service company that manages the appraisal process for community banks, mortgage bankers and credit unions. We offer the full array of commercial and residential appraisal products and services. We take the appraisal process from ordinary to extraordinary.

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