The Uniform Standards of Professional Appraisal Practice (USPAP) specifies the procedures to be followed in developing and communicating an appraisal, as well as the ethical rules for appraisal practice. Professional appraisal standards specifically require the study of all value influences. Prior to the valuation process and a Highest and Best Use analysis, the property rights must first be determined. Will the interest appraised be Fee Simple or Leased Fee?
A fee simple estate is the absolute ownership unencumbered by any other interest or estate. The bundle of rights associated with fee simple ownership are the right of possession, right of control, the right of enjoyment, the right of disposition, and the right of exclusion. Basically, as an owner-user, you have the right to occupy, enjoy, sell, and/or deny others to access the property.
In contrast, the leased fee interest is an ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others. Anytime the subject property is encumbered by a lease, including partial lease, short-term lease on a single-family residence, a ground lease, or billboard lease, the leased fee interest should be valued. A lease gives a tenant temporary access to occupy the property. The lease contract does not remove the rights, but rather, is an addition to the fee simple estate. This is evident when a property that is leased is sold. The lease is transferred to the owner. The new owner gets the full bundle of rights and the lease. As a result, the lease is considered a quasi-personality property.
It is important to have knowledge if a lease exist or if the subject property is owner-occupied to assist the appraiser in determining the most probably user (buyer) within the Highest and Best Use analysis, and provide the bank with a more accurate valuation of the subject property.
Reproduced from East West Bank Newsletter May 2016