HIGH POINTS OF IAAO’S PAPER “SETTING THE RECORD STRAIGHT ON FEE SIMPLE” AUGUST 2019

 
FEE SIMPLE ABSOLUTE
 
LEGAL DEFINITION
In Introduction to The Law of Real Property, fee simple is described as, 3 ... the largest estate known to law. It denotes the maximum of legal ownership, the greatest possible aggregate of rights, powers, privileges, and immunities which a person may have in land. It is an estate of potentially infinite duration in the holder’s successors who acquire the holder’s interest in the property either by conveyance, devise, or inheritance. The three hallmarks of the estate are that it is alienable, devisable, and descendible. (Moynihan and Kurtz 2002, 34)
APPRAISAL DEFINITION
The Appraisal of Real Estate, 2008 and 2013. The most complete form of ownership is the fee simple interest, that is, 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. (American Institute of Real Estate Appraisers 2008, 2013)
 
Unencumbered by any other interest or estate is a problematic phrase that has moved the definition away from the emphasis on infinite duration and inheritability to an implication that unspecified interests and encumbrances will result in something other than the fee simple estate. Interests and estates are somewhat generic terms and can be defined as, Interest. “The Property Restatement, following general legal usage, uses the term ‘interest’ to designate any single right, privilege, power, or immunity or, generically, ‘varying aggregates of rights, privileges, powers, and immunities’” (Stoebuck and Whitman 2000). Estate. “The amount, degree, nature, and quality of a person’s interest in land or other property; esp., a real estate interest that may become possessory, the ownership being measured in terms of duration” (Garner 2014, 664)
 
Regarding interests, a property held in fee simple may convey in a sale and transfer title encumbered with a lease or other interest without changing the fee simple estate. Although an interest encumbering the estate, such as an easement, a restrictive covenant, or a lease may lessen or enhance the value of the estate, it does not change the fact that a property is held in fee simple.
The courts also have noted the discrepancy between the legal and appraisal definitions of fee simple. The distinction between “fee simple” and “leased fee” is one drawn in the context of appraisal practice. The appraisal industry uses the term “fee simple” to refer to unencumbered property—or to property appraised as if it were unencumbered. This distinction is not one recognized by the law, however. A “fee simple” may be absolute, conditional, or subject to defeasance, but the mere existence of encumbrances does not affect its status as fee simple. (Meijer Stores Ltd. Partnership v. Franklin Cty. Bd. of Revision 2009; HIN, L.L.C. v. Cuyahoga Cnty. Bd. of Revision 2014)
 
It is rare, if ever, that an appraisal assignment for property tax purposes or otherwise requests a value of an unencumbered estate. If fee simple absolute were to imply valuing an unencumbered estate, the appraiser would value the property ignoring utility easements (i.e., gas, electric, water, and the like), access easements, and restrictive covenants (i.e., deed restrictions). Whereas many appraisal assignments request a value of the fee simple estate, it is unlikely that the purpose of the appraisal is to value the property ignoring easements and restrictive covenants, among other encumbrances. Thus, the appraiser is caught between conforming to the appraisal industry definition of fee simple (ignoring all encumbrances) and achieving the intended goal of the appraisal, which likely seeks a value considering utility and access easements and any restrictive covenants. This illogical result arising from the appraisal definition is pointed out in The Appraisal of Real Estate.
 
In sum, the important aspect to note is that the fee simple estate has nothing to do with leases, mortgages, liens, and deed restrictions or easements or any other encumbrance or distribution of property rights to others. The typical homeowner owns a home in fee simple absolute, and the deed reflects that estate. The existence of a mortgage does not mean the owner has less than a fee simple absolute estate. The home also has utility easements for water, power, and cable; however, the owner still holds the property in fee simple absolute. More specifically, the property is owned in fee simple absolute subject to the mortgage and the utility easements. And if the home is leased, then the property is owned in fee simple absolute subject to the lease. A fee simple estate or any other estate is not defeated by the existence of encumbrances, including a lease.
 
Fee Simple Absolute Estate and Leased Fee Interest
The existence of a lease and the separation of real estate rights between a landlord and a tenant does not destroy the fee simple absolute estate. Leased fee is a term defined by The Dictionary of Real Estate Appraisal as,  The ownership interest held by the lessor, which includes the right to receive the contract rent specified in a lease plus the reversionary right when the lease expires. The term is used by appraisers as a basis to estimate the lessor’s value subject to a lease. It is based usually on the capitalization of net operating income (NOI) or the sum of the present value of the forecast NOI over a holding period and the present value of the reversion. In reality, leased fee is synonymous with fee simple, subject to a lease when possession but not the ownership is temporarily transferred to another. (Appraisal Institute 2015, 128) (emphasis added)
 
Fee Simple and Vacancy
One of the significant controversies that has emerged from the ambiguous phrase unencumbered by any other interest or estate is the interpretation that a property encumbered by a lease is not fee simple, and that appraising a property in fee simple means one must assume the property is unencumbered by a lease, that is, vacant. This concept has come to be known as the dark store theory. Under this theory of the fee simple estate, multitenant office buildings and apartment buildings would be appraised as vacant properties even if fully occupied. Valuing the fee simple estate does not require valuing the property as a vacant building. Fee simple defines an estate. It is not synonymous with dark value or liquidation value. Fee simple estate is a property rights concept that has nothing to do with the status of occupancy. When a property transfers title, it still is considered to be held in fee simple whether the property is currently occupied, vacant, or under lease. The interpretation of fee simple as meaning vacant, even when the property is not, assumes a condition that is contrary to what exists, a hypothetical condition. That is not to say an appraisal assignment cannot request a go-dark value or that the property be appraised as vacant. Unless such an analysis is part of the defined scope of work, however, the phrase fee simple absolute should not imply vacant when the subject property is occupied.
Fee Simple is not a Value Concept
 Fee simple is not synonymous with market value. Fee simple is an estate and a property rights concept, not a value concept, although some appraisers have mistakenly used fee simple to imply “at market.” Market rent or market value is precisely that, and fee simple should not be used interchangeably with those terms. The fee simple estate can be valued assuming market rents just as an appraiser can value the fee simple estate of a property assuming the rents in place and the vacant units at market rent. The valuation performed is based on the scope of work and what is required by a taxing jurisdiction. More appropriately, an appraiser would define the scope of work accordingly, i.e., market value of the fee simple estate or fee simple estate assuming the subject property is vacant and available, if that is what is required. For the majority of taxing jurisdictions, what is required is fee simple absolute considering rents at market. III. Property Tax is Typically Based on Assessing the Property to One “Owner”
CONCLUSIONS The appraisal industry is too closely associated with the legal industry and the general real estate industry for different definitions to exist among the three. Review of the real estate industry shows that brokers and real estate salespersons, real estate financing persons, real estate attorneys, and the courts all understand fee simple to have the meaning set forth by the legal definition, which has remained constant throughout the centuries. Statutes governing property tax can also be assumed to follow the legal definition. There is no rationale for the appraisal industry to create its own definition for a term universally understood by the other participants in the real estate industry. None of this is to say that appraisers can ignore statutory or judicial interpretations of fee simple or any other appraisal concept. However, often legislative bodies and courts look to the appraisal industry for guidance in these areas. Once the definition of fee simple absolute is clarified, it is evident that fee simple is a property rights concept that does not mean vacant or unencumbered by a lease and it is not a value concept to be used interchangeably with market value. It is important to understand these distinctions so that the appraiser or assessor can properly define the appraisal problem. An appraiser can value the fee simple ownership of an occupied apartment building assuming leases in-place, market rents, or a lease-up period. The mere fact that there are renters in a commercial property does not detract from fee simple ownership. In other words, if that apartment building, whether occupied or vacant, were to convey in a sale, the deed would state that the property transferred in fee simple. What is being valued is based on the scope of work of the assignment. Whether the appraiser or assessor considers easements or above- or below-market leases is defined by the appraisal assignment and, in the case of property taxation, by the jurisdictional requirements mandated by statutes and the courts.
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