DART APPRAISAL DISCUSSES FEE SIMPLE ESTATE VS. LEASED FEE ESTATE
Dart Appraisal’s team of reviewers often encounters what appears to be a common misunderstanding about which portion of an estate should be valued when a client 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 a partial lease, a short-term lease on a single-family residence, a ground lease, or a 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 align with current market conditions. Therefore, the leased fee estate value is equal to the fee simple estate, but the property rights are appraised. Market value label should be leased fee estate for technical accuracy and consistency with appraisal industry standards and practice. Conversely, suppose the market rent is found to be greater or less than the contract rent. In that case, a leasehold estate exists in which the tenant holds a positive leasehold or a negative leasehold position.
An appraisal is often ordered for a tenant property, but a client wants to precisely 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, 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, 6th ed. (Chicago: Appraisal Institute, 2015).
Dart Appraisal 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 Dart Appraisal attempts to improve mutual understanding and communication between a client, appraiser, and Dart Appraisal team members, so we all operate in an effective and fully informed environment.
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