Leased Fee

Definition

A leased fee interest represents the landlord’s (lessor’s) ownership interest in a property that is currently under lease to a tenant (lessee). This interest can have significant value based on two primary components: the anticipated income generated from the lease, commonly referred to as rent, and the reversionary value of the property, which is the worth of the property upon the expiration of the lease.

Examples

Example 1: Commercial Real Estate

A commercial building is leased to a corporation for a term of 10 years. The landlord owns the building and derives income from the rent payments made by the corporation. The value of the leased fee interest, in this case, includes the total rent expected to be received over the 10-year period, as well as the property’s estimated value at the end of the lease.

Example 2: Residential Property

A residential apartment complex is leased to multiple tenants with varying lease terms. The landlord’s leased fee interest is based on the cumulative rent from all tenants and the property’s fair market value when the leases end.

Frequently Asked Questions (FAQs)

1. What is the difference between a leased fee interest and leasehold interest?

• Answer: Leased fee interest belongs to the landlord and includes the right to receive rent and the reversionary interest in the property upon lease expiration. Leasehold interest pertains to the tenant’s right to occupy and use the property for the lease term.

2. How is the value of a leased fee interest determined?

• Answer: The value is calculated by capitalizing the expected rental income and estimating the present value of the property at the end of the lease term. Appraisers use various methods such as the income capitalization approach and the discounted cash flow analysis.

3. What happens to a leased fee interest if the property is sold during the lease term?

• Answer: The purchaser acquires the property subject to the existing lease. The leased fee interest, including the right to collect rent and the reversionary interest, transfers to the new owner.

4. Can a landlord sell a leased fee interest separately from the property?

• Answer: Yes, a landlord can sell the leased fee interest as a financial instrument, especially in transactions involving income-producing commercial properties. The buyer then receives the anticipated rental income and the reversionary rights.

5. What impacts the value of a leased fee interest?

• Answer: Factors such as the length of the lease term, the creditworthiness of the tenant, lease terms and conditions, market rental rates, and the property’s future market value affect the value of a leased fee interest.

Related Terms

• Leasehold Interest: The tenant’s interest in a leased property, representing the right to occupy and use the property according to the lease terms.
• Reversionary Interest: The interest that a property owner retains after the expiration of a lease term, allowing them to regain full ownership and control of the property.
• Fair Market Rent: The market-driven rent amount that a property could reasonably command in an open and competitive rental market.
• Income Capitalization Approach: A property valuation method that determines value based on the property’s ability to generate income.

Online References

• Investopedia: Leased Fee Interest
• The Appraisal Institute: Valuing Leased Fee Interests
• RealtyMogul: Understanding Leased Fee Interests

Suggested Books for Further Studies

• “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
• “Appraisal of Real Estate” by Appraisal Institute
• “Real Estate Investment Analysis and Advanced Income Analysis” by Jack Cummings
• “Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher

Fundamentals of Leased Fee: Real Estate Basics Quiz

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