Introduction to Leased Fee Value
Leased fee value refers to the worth of a property to a landlord, considering its existing rental agreements. This value considers the rental income that can be derived under the current leases, which may differ from market value if the rental rates are below or above the market average.
Understanding Fee Simple Value vs. Leased Fee Value
While fee simple value reflects the overall market value of a property assuming it’s free of any leases or encumbrances, leased fee value quantifies the value when those rental agreements are taken into account.
Let’s consider Larry as an example. Larry purchased a building that was encumbered by long-term leases at below-market rental rates. Consequently, the property’s leased fee value was less than what its fee simple value would have been if it were unencumbered.
Factors Influencing Leased Fee Value
Various elements impact the leased fee value, including:
- Rental Rates: If current lease agreements reflect below-market rental rates, the leased fee value will be lower than the fee simple value.
- Lease Duration: Long-term leases can both positively and negatively affect the value, depending on market trends and rental rates.
- Tenant Quality: Reliable, financially stable tenants may boost the leased fee value compared to properties with high tenant turnover or unreliable tenants.
Leased Fee Value Calculation
The calculation for the leased fee value can be complex and generally requires the expertise of a professional appraiser. It involves assessing the net operating income (NOI), lease terms, and comparing them against current market conditions.
Advantages and Disadvantages for Investors
Advantages
- Predictable Income: Long-term leases can provide predictable income streams.
- Low Vacancy Rates: Encumbered properties often have lower vacancy rates, translating to fewer income interruptions.
Disadvantages
- Fixed Income: Properties with below-market leases limit income potential.
- Market Inflexibility: Unable to capitalize on rising market rents until lease expiries.
Frequently Asked Questions (FAQ)
1. What’s the difference between leased fee value and fee simple value?
Leased fee value takes existing leases into account, whereas fee simple value assumes the property is unencumbered.
2. How does a below-market lease affect the leased fee value?
A below-market lease will generally decrease the leased fee value as the realized rental income is lower than what could potentially be earned in open market conditions.
3. Can the leased fee value increase?
Yes, leased fee value can increase if the market rental rates rise or when high-quality, long-term tenants lease the property at favorable rates.
4. Should investors be discouraged from properties with below-market leases?
Not necessarily. While below-market leases may limit immediate income, stability and assured income can make such properties attractive in the long-term.
Related Terms: Fee Simple Value, Leasehold Value, Net Operating Income.
