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Leased Fee Vs Fee Simple

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Leased Fee Vs Fee Simple

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Leased Fee Vs Fee Simple

Here we go over an example of how you may be able to reduce your property taxes through an argument called Leased Fee Vs Fee Simple.

RULE 4 PROVIDES THAT WHEN USING THE SALES PRICES OF THE APPRAISAL SUBJECT OR OF COMPARABLE PROPERTIES IN VALUATION, THE ASSESSOR SHALL:

(b) When appraising an unencumbered fee interest, (1) convert the sales price of a property encumbered with a debt to which the property remained subject to its unencumbered fee price equivalent by adding to the sale price of the seller’s equity the price for which is estimated that such debt could have been sold under value indicative conditions at the time the sale price was negotiated and (2) convert the sale price of a property encumbered with a lease to which the property remained subject to its unencumbered fee price equivalent by deducting from the sale price of the seller’s equity the amount by which it is estimated that the lease enhanced that price or adding to the price of the seller’s equity the amount by which is estimated that the lease depressed that price.

Because the property interest being appraised is the unencumbered fee simple interest, the estimate of market rent must be made without regard to actual lease arrangements. Rule 8(d) states that in “valuing property encumbered by a lease, the net income to be capitalized is the amount the property would yield were it not so encumbered, whether this amount exceeds or falls short of the contract rent and whether the lessor or the lessee has agreed to pay the property tax.”

Assessor Handbook Support for Argument

ECONOMIC CHARACTERISTICS

Economic characteristics include all property attributes that affect its income stream. This element of comparison is generally applicable only to income-generating properties.  Significant economic characteristics include the following:

  • Level of operating expenses
  • Quality of management
  • Tenant quality (e.g., credit rating)
  • Certain lease provisions (rent concessions, expense stops and recoveries, lease expiration, renewal options, etc., but not including above- or below- market rents

Adjustments for economic characteristics should not be confused with adjustments for differences in property rights conveyed (e.g., rents that are not current marketing) or market conditions. Frequently, adjustments for economic characteristics are difficult to isolate and measure within the comparative sales approach. A paired sales analysis, for example, would require two comparable sales that differ only in the economic characteristics whose marginal value is being measured. This is a very rigorous data requirement. Whenever possible, the appraiser should identify comparable properties with economic characteristics similar to the subject and thereby avoid the need for this type of adjustment.

CAPITALIZATION OF RENT DIFFERENCE

Differences in rent (either a gain or loss) due to a specific property characteristics may be capitalized into an estimate of an adjustment amount. This technique is typically used to make adjustments for differences in physical characteristics, although it can be used for any difference between properties for which a permanent rent difference can be estimated. Obviously, an estimated capitalization rate is also required. For example, the subject property may have an elevator while a comparable property does not. Using market rental data, a rent differential for the two properties is estimated and capitalized – using direct capitalization – into an estimate of the adjustment. Both the rent difference and the capitalization rate should be market supported.

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