It Has ALWAYS Been Leased Fee Interest

Following is a recent conversation between a bank review appraiser and a fee appraiser:

Dear Fee Appraiser,

A review has been completed on your appraisal of the Apartment located at XYZ in City, ST and am wondering if you could provide some clarity in the following area:

I am wondering how the property rights appraised can be Fee Simple, when the subject apartment building is not vacant.

Thank you for addressing this item. Please make any necessary revisions and return a revised report to me at your earliest convenience.


Review Appraiser


Mr. Review Appraiser,

The subject property has current contract rents on a very short-term basis (most are month-to-month), and the rental rates at completion are based on market rental rates.  In both analyses, market rental rates are utilized (see Page 78).  Therefore, the market value opinion is fee simple.  If contract rental rates are market rental rates, the fee simple and leased fee values are essentially equivalent.

The report date has been changed to the current date to comply with USPAP.  Thank you for your input.


Fee Appraiser


Mr. Fee Appraiser,

Your prompt response has been greatly appreciated.

Please refer to an explanation regarding the leased fee interest on Page 114 of the Appraisal of Real Estate (13th edition) as follows:

“The lessor’s interest in a property is  considered a leased fee interest regardless of the duration of the lease, the specified rent, the parties to the lease, or any of the terms in the lease contract. A leased property, even one with rent that is consistent with market rent, is appraised as a leased fee interest, not as a fee simple interest  ……”

If the contract rent is the same as the market rent, the leased fee value becomes equivalent to the fee simple value, not the other way around.

Thank you in advance for your quick follow up on our request.


Review Appraiser



Geez, for almost my entire 29+ year career I have had to deal with this error made by many appraisers.  Thankfully, over the years, fewer and fewer appraisers think lease terms have anything to do with the property interest appraised.  OCCUPANCY is essentially all that matters in this determination.

The quote the reviewer presents from the 13th Edition is 100% on target.  In fact, it sounds exactly like my response over the past 20+ years….since I contribute to the each edition of The Appraisal of Real Estate and this is a pet peeve, the odds are those are words I wrote.  Obviously, I like them:) lol

I have had exactly ONE existing apartment complex appraised as Fee Simple Estate.  It was a 200-unit apartment project in Orlando in 2007 that had been vacated for condo conversion and the market crashed and that did not happen.  In that case, the owner could immediately occupy all 200 units, if they so desired.

Another item the above fee appraiser assumed, that is likely in error, is that the subject contract rents were all at market.  Once an existing apartment property is a few years old, it is near impossible that all of the contract rents are at market.  My experience is actual income from contract rents is typically 5% to 25% (!) below the hypothetical market rent at 100% occupancy – this is often termed Economic Vacancy….and often not accounted for by many appraisers.

I encourage all appraisers to simply read the definitions of Fee Simple Estate and Leased Fee Interest.  It is clear as day that lease terms are not mentioned.  Also, note this nitpicky item – only Fee Simple is an ‘Estate’ – everything else is an ‘Interest.’  Why?  I don’t know.  I just had this pointed out to me while on The Dictionary of Real Estate Appraisal committee.

This is a long first post….but, I want to thank the Chief Appraiser who shared this item with me and allowed me to redact the emails and post the conversation above.  I look forward to doing this on an ongoing basis.  My hope is all of us can learn from these situations – fee appraisers, review appraisers, newbie fee and review appraisers, bank credit employees, et al.