Ask Henry

Leased Fee Appraisals

Dear H2,

I am appraising a four unit property that has all four units rented. Page 1 asks me the property rights. Do I check leasehold, fee simple, or other. There are some education courses stating that if one of the units is rented, then it is leased fee and the appraiser should check the box “other” on page 1 and call it leased fee.

Leasehold estate is defined as the right to use and occupy real estate for a stated term and under certain conditions that have been conveyed by a lease. Leased fee is defined as an ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; usually consists of the right to receive rent and the right to repossession at the termination of lease. In theory, this would be true, as the subject is rented at time of appraisal report.

My question is what is the appraiser supposed to mark at this time? If it is a leasehold, or leased fee, does the appraiser then mark the comparables as leased fee if the appraiser can verify leases? What if the appraiser cannot verify the leases for the comparables — are they then marked "fee simple"?

What is page 1 asking? Aren't they asking for the rights that transfer if the property sells? Would it not be common for the complete rights to be transferred with the Leased Fee interest referring back to the Leaseholder at the time of transfer; therefore, wouldn't the transfer be fee simple as the whole bundle of rights are transferred to a new owner?

What is the correct way in the eyes of Fannie Mae to complete page 1 if the subjects 4 units are under lease? I need some definitive clarification on this as I am seeing many different takes on this. I have always considered such properties "fee simple" because the duration of the leases are short term. I am not addressing land leases. Owner of land is also owner of the improvements, who is leasing four units to renters on a yearly lease. Please help!

Thank you,
Ron Coffman

Dear Ron,

It sounds like you are doing a mortgage appraisal that is going to be sold to Fannie Mae or Freddie Mac. They are only interested in property that is owned in fee simple, so that is what you should indicate on the form. If there is a long lease on the property, at some rent other than market rent, you would have to deal with the possibility that there is a leasehold interest on the part of the tenant. That is very unusual in a four family dwelling.

However, when you appraise any property that is leased, you have to be careful that there is nothing unusual in the lease. I recommend — as part of your dialogue with the lender/client — that you tell them you must have copies of all the leases. If they are not obtainable, you are going to have to say this in the appraisal report, and then make some about the key features of the leases. This is not going to make anyone happy. If you decide go this route, you should get permission in writing to do this from the lender/client before you proceed, only to find out later that the appraisal is not acceptable to them. If you are, in fact, doing a leasehold interest appraisal, you need to have a clear understanding with the lender/client as to what you are doing and for whom!