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 InstituteIn 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
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.
Cliggitt Valuation, Inc.
Real Estate Analysts & Advisors
Based in Central Florida (Lakeland, FL)
863-661-1165
www.cliggitt.com
Thanks for explaining the concept of free simple interest in such a good way, so that any person can understand it very well.Really worth to read.
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Good post, thanks for sharing. It is an essential thing to have a better knowledge about property appraisal, in order to avoid misunderstandings in transacting an appraisal business.
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