Leased Fee Vs Fee Simple

This article aims to provide insights into the concepts of Leased Fee and Fee Simple property interests, and how they can impact property taxes. By understanding these concepts, property owners may be able to reduce their property taxes through an argument called Leased Fee Vs Fee Simple.

Rule 4: Sales Prices in Valuation

Appraising Unencumbered Fee Interests

Rule 4 provides guidance on how to use sales prices in the valuation process. When appraising an unencumbered fee interest, the assessor should:

1. Convert the sales price of a property encumbered with a debt to its unencumbered fee price equivalent by adding the estimated price for which the debt could have been sold under value indicative conditions at the time the sale price was negotiated.
2. Convert the sales price of a property encumbered with a lease to its unencumbered fee price equivalent by deducting the estimated amount by which the lease enhanced the price or adding the amount by which the lease depressed the price.

Market Rent Estimation for Unencumbered Fee Simple Interest

When appraising an unencumbered fee simple interest, the estimate of market rent must be made without regard to actual lease arrangements. Rule 8(d) states that the net income to be capitalized should be the amount the property would yield if it were not encumbered by a lease.

Assessor Handbook: Economic Characteristics

Economic characteristics include property attributes that affect its income stream. They are generally applicable only to income-generating properties. Significant economic characteristics include:

• 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 or market conditions. The appraiser should identify comparable properties with similar economic characteristics to avoid the need for adjustments.

Capitalization of Rent Difference

Differences in rent due to 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, but can be used for any difference between properties for which a permanent rent difference can be estimated.

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.

Conclusion

Understanding the differences between Leased Fee and Fee Simple property interests and their impact on property valuation is crucial for property owners who want to reduce their property taxes. By considering the guidance provided by Rule 4, market rent estimation, economic characteristics, and capitalization of rent difference techniques, property owners can make a strong argument for a reduction in their property taxes.