Real Estate Appraisal - The Fee Simple Interest

"Real Estate Appraisal" - The Fee Simple Interest
The term fee simple in an appraisal is describing a group/bundle of rights associated with the ownership of the property.

Fee Simple is defined as "absolute ownerhsip unencumbered by any other interest or estate, subject only to the limitations imposed by governmental powers of taxation, eminent domain, police power, and escheat." definition from The Appraisal of Real Estate, Appraisal Institute

In essence, fee simple interest ownership in property is a complete form of ownership, subject only to standard goverment power. It is the most wholistic form of legal ownership there is.

So in an appraisal, when the appraiser states that he/she is appraising the fee simple interest in the property, they are stating that they are appraising the property unencumbered, except regarding the 4 governmental powers described above. The complete group of rights or many times referred to as a bundle of rights included with fee simple ownership are:

• The right to sell or sell an interest in the property
• The right to lease or lease an interest in the property
• The right to mortgage the property
• The right to give away/gift the property or an interest in the property
• The right to do none or all of these things

Doing any of the above, except of course for the last bullet of doing none of the above, will create a fractional ownership interest in the property that will typically need to be analyzed or discussed in an appraisal. For instance - when a property owner leases a property to a tenant for say a 5 year period, the property owner has given up the right of use/occupancy of the property and the tenant has gained that right for the 5 year lease period. However, the owner - now landlord - has given up that right for the right to receive income/rent from that tenant over the 5 year term of the lease. The leasing of the property to a tenant for 5 years has created a leased fee interest in the property for the owner and a leasehold interest in the property for the tenant.

Leased Fee Interest is defined as - "An ownership interest held by a landlord with the rights of use and occupancy transferred by the lease to others. The rights of the lessor (leased fee owner) and the leased fee are specified by contract terms contained within the lease" - Appraisal of Real Estate, Appraisal Institute

Leasehold Interest is defined as - "The interest held by the lessee (the tenant or renter) through a lease transferring the rights of  use and occupancy for a stated term under certain conditions as specified in the lease" - also from the Appraisal of Real Estate, Appraisal Institute

Leasing a property does create a form of fractional interest in real property. This is one example of how a partial interest in a property is granted/conveyed by an owner of property.

So does leasing a property change the value of the property, since some of the fee simple interest - bundle of rights - have been granted to a tenant? This is a very good question and one that is encountered often when appraising a property, however the answer is not yes or no but, it depends. It depends on the difference between contract rent and market rent, as well as the value of the fee simple interest (unencumbered), the length of the lease, the amount of lease (lease rate), and how that compares to market lease rates and terms. It also depends on investor perceptions, and a range of other issues.

If you have questions regarding how a lease could impact the value of your real estate or any other questions regarding a whole or fractional interest in real property, we are available to assist.

Please feel free to contact us.

Mike Cliggitt, MAI, MRICS

Cliggitt Valuation, Inc.
Real Estate Analysts & Advisors
Based in Central Florida (Lakeland, FL)
863-661-1165
www.cliggitt.com