Real Property Valuation Issues - Fee Simple versus Leased Fee

Valuation theory holds that interests or rights in real estate are to be valued rather than physical land and buildings themselves. Standards require that interests or rights be identified and reported. In ordering and completing appraisal reports then, the issue of which property rights should be valued often comes up. The primary property rights in appraisals are Fee Simple Estate or Leased Fee Estate. Fee simple includes the “full bundle” of rights while leases convey partial property rights to tenants for their use and occupancy. Following are definitions currently in use by the valuation profession (Dictionary of Real Estate Appraisal, 6th edition):
Fee Simple Estate – Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
Leased Fee Estate – The ownership interest that the landlord or lessor maintains in a property under a lease with the rights of use and occupancy being conveyed or granted to a tenant or lessee. The ownership interest in a leased property.
If not spelled out specifically, there may be some differences in interpretation among appraisers as to whether a leased fee or fee simple value should be presented. Many banks may take a generally prevailing view that if there is a lease, you must present the leased fee interest. However, as an appraiser it often generates questions such as, “shouldn’t we be determining how a typical buyer would view the lease and its impact on value? Should you really present the leased fee interest if there’s only a short term lease or leases remaining?

A desire for more consistency on these matters prompted the Appraisal Institute to hold discussions on and draft a Property Rights Symposium Discussion Paper (12/21/17). When a property is leased and the value of a lease interest is sought, the valuation process will reflect the lease and account for any loss or benefit due to the rent being above or below market or loss due to the time and cost to lease vacant space. But when the assignment is to value the fee simple estate in property that is typically leased and sold as leased, questions arise as to whether it should be valued as though occupied or as though vacant. This question is critical in eminent domain and property taxation where law or regulation generally requires the valuation of the fee simple estate, even if a lease exists. It is also an important question in mortgage lending when lease income is needed to repay the loan but there is risk of unexpected vacancy. The paper brings up the issue: does fee simple mean vacant and available for lease or occupancy? If so, should deductions be made for lease up time and cost? Does fee simple imply a “go dark” scenario? Also, how does the interest valued relate to your selection and adjustment of comps, and selection of an appropriate capitalization rate? The symposium concludes that the definition of fee simple may need changes. They suggest: “Fee simple estate. The highest estate allowed by law. An inheritable ownership interest of indefinite duration.” In addition, it was suggested that the valuation profession discontinue use of the terms leased fee and leased fee estate. Potential implications of these proposals are that valuers would need to determine, and valuation reports clearly state, the estate (fee simple, leasehold, or life estate) as well as the actual or assumed interests associated with the real estate that are reflected in the valuation. Depending on the question to be answered by the valuation for a property that is leased, or would likely be leased, the valuation could be subject to the existing lease, subject to leases at market rates and terms, or as though vacant and available to be leased at market rates and terms. The valuer generally must consult with the client to clarify which interests to value.

Application in sale and income approaches: the concept of “market value” is linked to specified property rights. It is the “transfer” (a hypothetical sale, the foundation of an opinion of value by an appraiser) where property rights intersect with the concept of market value, because every sale will have a transfer of some rights. So to appraise a subject property we hypothetically create the situation of a “transfer” or sale, and with that hypothetical sale we have to specify which set of property rights are transferred so that the type of value we are opining is clear. Accordingly, every sale comparable that has transferred did so with a specified set of property rights, and thus has to either match the property rights stated in the appraisal of the subject property or be adjusted appropriately. When the fee simple interest is valued, the presumption is that the property is available to be leased at market rates. A lease at market rent would not increase the market value of real property rights to the fee simple estate. Any potential value increment in excess of a fee simple estate is attributable to the particular lease contract”. (The Appraisal of Real Estate, 14th Ed., Chapter 21: The Income Capitalization Approach, p. 441). In the development and analysis for the Income Approach to Value, an appraiser may find that the lease terms are in line with current market conditions, and therefore, the value of the leased fee estate may be equivalent to the fee simple estate, but the property rights appraised and market value label should be leased fee estate for technical accuracy and consistency with appraisal industry standards and practice. Conversely, if the market rent is found to be greater or less than the contract rent, a leasehold estate exists in which the tenant holds positive or negative leasehold position.
I often order appraisal reports requesting that both a “leased fee” and a hypothetical “fee simple” value estimate are to be provided. This may help a bank to better analyze collateral from a lease contract/risk perspective, as well as a hypothetical “fee simple” with an assumption made that the property is available for lease at market rates and market risk. Usually, a “stabilized value” is sought in this fee simple hypothetical as though the property has achieved stabilized leaseup at market rents. An alternative value could also be sought in some cases for a “go dark” scenario with assumption that the property is vacated and available for sale.
Disclaimer: this blog is the opinion of the writer only and does not necessarily reflect the views of the writer’s employer.

Wither, Weed?

Michigan, get ready! The commercialization of adult use marijuana nears. Last November, when the voters approved the marijuana adult use ballot initiative known as Michigan Regulatory and Taxation Marijuana Act (MRTMA), commercialization seemed a long ways away. Not true anymore. Less than 100 days.
The Marijuana Regulatory Agency (MRA) of the Department of Licensing and Regulation (LARA) recently issued Emergency Rules for regulating and controlling aspects of the adult use business. They then indicated that, if all went well, MRA would begin accepting applications for MRTMA licenses on November 1, 2019. Not long now. Current MMFLA licensees are chomping at the bit to get applications submitted and licenses issued within a short period of time after the application window opens at MRA. Adult use products could be available for the holidays this year.
Why is all this important for members of CAR? There is tremendous demand for locations for operations to serve the adult use business. Prospective licensees need to find industrial and agricultural properties for growers and processors under both MMFLA and MRTMA. Both laws mandate that they locate facilities in zones allowing industrial and agricultural uses. Then there’s the retail outlets: the “Provisioning Center” under MMFLA and the “Marijuana Retailer” under MRTMA. Commercial districts are targets. As we’ve seen in Grand Rapids, the main business thoroughfares have had multiple properties placed under contract as possible sites for the medical marijuana operations at this time. Keep in mind, MRTMA future uses. Eight locations in Traverse City alone in a two block area on Front Street.
The prices potential licensees are paying for these locations is enormous compared to current assessed values. Just saw that a fully licensed, non-operating Provisioning Center of 4,000 square feet in the River Rouge area has an asking price of 18 million dollars.
There are currently 251 MMFLA licensees (99 Growers and 125 Provisioning Centers). Keep in mind that in the former category, several of the licensees are extremely large entities and hold numerous Class C licenses (up to 1,500 plants per license). Those licenses right now are $66,000 per year. If you stack 10 of those licenses in one location for up to 15,000 plants, that’s a big operation. This is what you may come to see in the future as this marijuana business develops in Michigan.
The trick for prospective licensees and realtors is to find a municipality which allows some form of marijuana business enterprise to be located within its boundaries. Under the MMFLA, the key is “opt-in”. That means that we started with the 1,773 municipalities in the State not allowing any operations. That law gives to each municipality the right to carve out its own law if it wanted to allow operations for medical marijuana businesses within the municipal boundaries. Until recently, less than 120 municipalities had opted in. That’s expanding as community leaders realize the benefits.
Under MRTMA, it’s the opposite. Every municipality is in, unless it chooses to “opt-out”. For the most part, every municipality which has been faced with the decision has opted out or will do so by November 1. If they miss the deadline and MRA starts receiving applications, they’re in and they did not get to carve out their own ordinance provisions. Many of the municipalities have stated they want to carve their own ordinance and so opt out first, giving time to see what the Emergency Rules provide as well as what they want in their community. As your clients look for places in every municipality in the State, remember that every ordinance is different. Every municipality carves its own provisions as to types of licensed establishments it will allow and numbers. In the case of the City of Grand Rapids, it developed a system for scoring and a draw for locations. There’s the 2,000 foot radius buffer zone and another 1,000 foot radius buffer from “sensitive areas”. You have to know what every municipality wants. Nowadays, most are holding drawings so applications for municipal preliminary licenses have due dates.
Then with MRTMA there are new types of additional licenses which business people will be looking at using. There’s the licensed designated consumption establishment (ie: smoking lounges). Will a convenience store want to add it? What about a bar owner with an additional location for the smoking lounge? Then there’s the temporary marijuana event license. Instead of Celebration on the Grand, how about a Cannabis Celebration on Calder Plaza or in the parking lot of a mall, or in an open field? Then there’s the new Microbusiness for up to 150 plants for state residents who are not now MMFLA licensed.
Lots of opportunities ahead for CAR realtors in all areas of Michigan in this burgeoning field. Stay up to date on municipal requirements and find those primo locations for your clients.

Changes To The Marketable Record Title Act Could Impact Closings

Every real estate contract must, unless agreed to otherwise, convey what is known as “marketable title”. The courts have defined marketable title as title that is free from encumbrances and assures the purchaser of quiet and peaceful enjoyment of the property. The Marketable Record Title Act (“MTA”) generally provides that a purchaser has marketable title if they have an unbroken chain of record title to any interest in Michigan real estate for 40 years (20 years for mineral interests), where there are no documents in the chain of title purporting to divest that person of title.

On December 28, 2018 the Michigan legislature passed Senate Bill 671 which amends the MTA. The bill took effect on March 29, 2019. Prior to the amendments, the MTA limited a title examination to the most recent 40 years (20 years for mineral interests) with any defects occurring prior to that time disregarded. While the amendments to the MTA attempt to clean up and simplify title in in certain situations, they may have unintended consequences for homeowners associations and condominium associations as affirmative actions will now be required to preserve certain use restrictions.

For example, if a homeowners association has a 40 year old subdivision deed restriction against building unattached garages or decks, a sale of a lot within the subdivision without a specific reference to that 40 year old restriction could wipe out that restriction with respect to that lot. In this situation it is not clear who should file notice under the amendments to preserve the restriction, the seller or the homeowners association. The homeowners association may ultimately be forced to review all deeds in the subdivision to make sure any old restrictions are properly referenced so they will continue to be enforceable against new purchasers.

Prior to the amendments, concerns were raised as to what exactly the MTA required to preserve an interest or use restriction. It is common for deeds to have generic statements such as “subject to anything of record”, “subject to existing use restrictions, if any” or “subject to easements and restrictions of record” and some title companies were reluctant to issue title insurance in these instances. The amendments to the MTA seek to clean up title in situations where deeds contain these generic statements or where title is subject to restrictions that are over 40 years old (20 years old for mineral interests). Simply using this generic language will no longer restart the 40 or 20 year time period and the amendments generally will invalidate a reserved interest or use restriction that is not specifically identified in the chain of title within the last 40 years.

The amendments to the MTA do provide for a 2 year window (from March 29, 2019) for recording a notice to preserve such interests or use restrictions that are more than 40 year old (20 years for mineral interests). The amendments require the notice to contain very specific information. After March 29, 2021 when the window closes, notice of interests or restrictions must be recorded within the 40 year time period (20 years for mineral interests) and must contain the required identifying information or the claimed interest or restriction will no longer be preserved and will be void as a matter of law.

Many questions are still left unresolved, including who is a claimant entitled to file notice under the amendments to MTA. Deed and use restriction may or may not go away and closings may be delayed as title companies, sellers and buyers seek to sort through the confusion and figure out what deed and use restrictions are still valid under the amended MTA.

REALTOR Safety Reminders

Be aware of your personal safety as you meet new clients and show vacant properties. Check out this video from the National Association of REALTORS for great tips to implement into your business practices:


CARWM members: RPR is a tool developed by NAR that is included in your membership dues. RPR is integrated into our system. Access RPR by clicking on the TOOLS tab, and then RPR.

Since 2012, RPR has offered REALTORS® an exclusive resource to support clients and customers in the commercial marketplace. In an industry of rapidly evolving technology and strong competition, RPR has consistently worked to improve its commercial resources, including the RPR Commercial Mobile app.
In 2019, RPR is further expanding its commercial programs and features through:
Expanded licensing of commercial data
High value commercial product integrations
New strategic outreach programs focused on building stronger relationships with commercial brokers and franchisors.

Expanded Data Licensing Increases RPR Active Commercial Listing Counts in 2019
RPR has more than 665 thousand active commercial listings and 43 million off-market properties to-date, including a direct partnership with Catylist, licensing over 100,000 listings representing more than 45 Associations across the country. Additionally, RPR is pleased to announce the execution of an agreement with Brevitas, which will add 40 thousand commercial listings nationwide.
"An integration between and RPR's comprehensive database gives REALTORS® an instant competitive advantage. Real time insights into commercial property are critical to making informed decisions. The connection to the data provided by RPR will be invaluable to the REALTORS® listing and searching on We're extremely excited about our partnership."

Ardian Zagari, Co-Founder & CEO – Brevitas, San Francisco, CA

RPR is working with two additional national commercial listing platforms with each currently reviewing data licensing terms. These partnerships, along with the new collaboration with Brevitas, gives RPR the potential of adding almost 200,000 commercial listings in the first half of 2019. This would bring the total number of active listings on the RPR Commercial platform to more than 850,000 properties, all exclusively for REALTORS® as a benefit of membership.
RPR also continues to support NAR's Commercial Leadership on the Commercial Listing Platform initiative. With balanced results from members on the value of multiple systems, RPR is collaborating with each of the selected companies allowing members to choose the public listing platform they prefer. Each platform will provide a data feed to RPR, which will allow members to access properties and network with REALTORS® nationwide.

The Value of Commercial integrations – Valuate® Case Study
RPR is investing resources to create integrations with products that create easy, streamlined business solutions for members. It's not just about what each product can do, but how the products interact together producing the most straightforward experience for agents and brokers.
For example, Valuate® is an analysis program that allows REALTORS® to present and market investment properties from both the RPR website and Mobile app. Since its integration with RPR in 2016, Valuate® has evolved as the REALTOR'S®'s go-to tool for projecting investment returns, comparing multiple properties and scenarios, and assessing risks resulting in the best investment opportunity for the client.
With the RPR and Valuate® teams working in tandem on studying member usage and applying member feedback to continuously improve the experience, more than 125 thousand REALTORS® across the country have adopted this offering and produced more than 270 thousand analyses for clients on properties valuing at more than $261 billion dollars.

"Valuate® is an easy to use analysis tool within RPR that makes evaluating an investment property common sense. Most programs take hours to learn and still are too difficult or not practical to use. This is why most REALTORS® give up using investment software. Thank you RPR for bringing this member value to us!"
Mike Vachani, MBA, CIPS, President and Managing Broker – Realty & Investment, Los Angeles, CA

Commercial Brokerage Outreach in 2019
In 2011, RPR released its Broker Tool Set (BTS), a suite of products and features for brokerage firms and franchises, including:
Company Branding
Affiliated Services Support Modules
Market Data Tool
Broker Automated Valuation Model (AVM)
Brokerages ability to Insert Custom PDF pages into all RPR reports
Today, BTS participation includes over 8,000 companies representing over 520,000 REALTORS® including 186 of the top 250 brokers in the U.S. As a measure of success, RPR usage in companies utilizing Company Branding is 45% higher than those that are not branded. This serves to increase RPR's overall value through increased adoption, and also supports the tremendous investment companies make into their brand by extending it to the RPR web and Mobile platforms. As well as all the reports agents create for consumer use in buying, selling and leasing properties across the U.S.
In 2019, RPR is extending that success to identify, research and engage key franchisors, brokerages and offices in a new Commercial 100 program (C100). This will focus on offering top commercial firms and divisions with high value programs and support, such as customized monthly webinars, commercial branding on the RPR site, reports, the Mobile app and best practice articles to help each respective company share the value across their markets.
A couple of the most engaged C-100 companies include SVN and First Weber Commercial. At the start of 2019, RPR was invited to join SVN's preferred vendor program which was created to support more than one thousand commercial professionals. This program identifies key commercial products and services that benefit SVN and their franchisees across the country.
With career development a top priority, First Weber Commercial has collaborated with the RPR team to customize trainings, so their agents can maximize the RPR resources. Many commercial practitioners at First Weber have integrated RPR for their business as a result of learning the depths of information they can make available for their clients.

"I made six figures on a deal thanks to resources I have as a REALTOR® and national retailers have referred me to other businesses based on the depths of data, analysis capabilities and informational reports they receive as a result of choosing me. It was a no-brainer for me to share the importance of this resource with the SVN Corporate Team so my colleagues across the country take advantage of RPR."
Deena Zimmerman, Vice President – Chicago Commercial, Chicago, IL

"First Weber Commercial Division couldn't be more pleased with the ever improving and evolving RPR product for commercial/investment real estate. RPR's database of properties is robust and superior in most rural areas. The support staff have been very proactive in delivering training in a wide variety of methods and the cost cannot be beaten as it is included in REALTOR® dues."
Dan Lee, Vice President – Weber Co, Madison, Wisconsin