Valuation Management Group often receives questions from clients about values that are reported as having either leased fee or fee simple property rights. These questions can come up during the ordering of appraisal services or during the appraisal report review process. What is the difference between these two technical terms? Quite simply, fee simple property rights are defined as “absolute ownership unencumbered by any other interest or estate…” (The Dictionary of Real Estate Appraisal, Fifth Edition, 2010, by Appraisal Institute). Leased Fee represents “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 Appraisal of Real Estate, Thirteenth Edition, published by Appraisal Institute, offers the following comments, “The lessor’s interest in a property is considered a leased fee interest regardless of the duration of the lease, the specified rent, the parties to the lease, or any of the terms of the lease contract. A leased property, even one with rent that is consistent with market rent, is appraised as a leased fee interest, not as a fee simple interest.”
Fee Simple and Leased Fee property rights are often confused by users of appraisal reports with leasehold and leased fee advantages. The property rights are defined by the right of use and occupancy, but if a property is leased, the amount of the rent might advantage the landlord or tenant. If a property is leased to a tenant at rent which is determined to be below-market, a leasehold advantage might exist and a potential buyer of the property might anticipate a discount when purchasing the real estate. On the other hand, if the contract rent is above-market, the landlord might enjoy a leased fee advantage and attempt to obtain a premium from prospective purchasers.
When ordering an appraisal report, clients usually request the market value “as is” of the existing property rights. And if the property is leased, they might also request a hypothetical value of the fee simple estate, in order to evaluate the real estate in the event the tenant was to vacate the premises. Valuation Management Group (VMG) listens carefully to the client’s needs when engaging appraisal services to ensure the client’s expectations are met upon delivery of the final report. Engaging and reviewing appraisals of leased properties is only one of many appraisal management services that VMG performs for its clients.
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 VMG 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 financial institutions, 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.