value of a property be based on the fee simple estate
. (318) In both
This compels appraisers to consider only the fee simple estate
under single ownership when analyzing market value or market rental value of real property for the purpose of assisting condemning authorities in determining just compensation.
The advent of modern portfolio theory and its subsequent adoption by institutional real estate investors has made it a challenge to appraise the fee simple estate
of property that is typically sold with a lease in place.
(106) These challenges led to a revision of the original objective and the Nisga'a Land Titles System, to allow holders of these entitlements, through the provisions in the Nisga'a Landholding Transition Act, to transition them to an estate in fee simple, which then enables the holder to transfer or mortgage the fee simple estate
Other easements such as conservation easements and scenic easements may prohibit the owner of the underlying fee simple estate
from certain uses of the property without giving the holder of the easement any possessory interest in the real estate.
(70) The adoption of the fee simple estate
, the allocation of small parcels of land, and the institution of land registries mirror de Soto's policy prescriptions for obtaining clear title.
In a proper market value appraisal of a fee simple estate
in a property leased above market (such as in some ad valorem cases), excess rent is never addressed because the property must be appraised as unencumbered.
After a hypothetical value for the fee simple estate
is estimated then the analyst can move on to the valuation of other parts of the "pie" displayed in Figure 1.
(1.) In this discussion, the vacancy issue for fee simple estate
valuation is ignored.
The difference between the leased fee and fee simple estate
should be addressed in the income capitalization and sales comparison approaches.
Mueller's comments he seems to be agreeing with us when he states "The authors' approach becomes clear when rent shortfalls are addressed for what they are: negative cash flow to the fee simple estate
. With negative cash flows, lower yield rates convey greater risk, as they distance the loss further from zero.
Because the income from new leasing of space is riskier and must be discounted at a higher rate, the rent differential in Exhibit II must be discounted at a lower rate so that the average of these two rates is about the same as the rate that would be applied to the fee simple estate
. Again the conclusion is that the rate must be lower for the rent loss.