Leased Fee
Definition
The term “Leased Fee” refers to the landlord’s ownership interest in a property that is currently under lease. This interest represents the rights of the landlord, including the reversionary interest at the end of the lease term. The value of the leased fee is primarily based on the anticipated rental income over the lease period.
Examples
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Residential Example: A landowner in Hawaii leases a plot of land to an individual who builds a home on it. The landowner holds a leased fee interest in the land, which includes all rights and future interests, excluding the leaseholder’s rights during the term of the lease.
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Commercial Example: An investor owns a multi-tenant office building. The ownership interests and rights retained by the landlord through rental agreements with the tenants constitute the leased fee. The investor derives value from the contractual rents over the lease terms.
Frequently Asked Questions
What is a leased fee valuation?
A leased fee valuation is the process of determining the value of the landlord’s interest in a leased property. This valuation considers the income generated from rents, the duration of the leases, and the reversionary value at the end of the lease term.
How does leased fee differ from leasehold interest?
A leasehold interest is the tenant’s right to use and occupy real estate for the term of the lease, while the leased fee is the owner’s retained interest in the property, which includes the right to receive rental income and the reversionary interest after the lease ends.
Can leased fee interests be sold?
Yes, leased fee interests can be sold. The new owner would acquire the rights to the rental income until the end of the lease term along with the reversionary interest.
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Leasehold Interest: The right held by a tenant to use and occupy leased real estate for the term specified in the lease agreement.
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Fee Simple: The most extensive interest in land that one can possess; includes absolute ownership unencumbered by any other interest or estate.
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Reversionary Interest: The interest retained by the lessor after granting a lease, which will mature into full fee simple ownership upon the termination of the lease.
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Ground Lease: A lease agreement in which a tenant is granted rights to develop or use land over a long-term period, typically where improvements made by the tenant revert to the landlord.
Online Resources
References
- Appraisal Institute. “The Appraisal of Real Estate.”
- Katz, Joseph P. and Dell, Daniel. “Real Estate: Practice, Theory, and Issues.”
- Altman, Edward I. “Understanding Corporate Insolvency: A Handbook on Bankruptcy and Distressed Advice.”
Suggested Books for Further Studies
- “Fundamentals of Real Estate Appraisal” by William L. Ventolo Jr. and Martha R. Williams
- “Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
Real Estate Basics: Leased Fee Fundamentals Quiz
### What constitutes the landlord's interest in a leased fee?
- [x] Rental income and reversionary interest.
- [ ] Only the physical property.
- [ ] The rights to resell the lease.
- [ ] Utility payments from tenants.
> **Explanation:** The landlord's interest in a leased fee includes both the rental income received during the lease term and the reversionary interest, retained for future possession of the property.
### How is the value of a leased fee primarily determined?
- [ ] Based on the market value of similar properties.
- [x] By the anticipated rental income from the property.
- [ ] Through the physical condition of the property.
- [ ] By the tenant's occupancy preferences.
> **Explanation:** The value of a leased fee is mainly determined by the income anticipated from rental payments over the lease's duration.
### Which of the following best describes a leased fee interest?
- [ ] The interest held by a tenant in rental property.
- [x] The interest retained by a landlord in his leased property.
- [ ] An agent's right to commission from a lease agreement.
- [ ] The value of improvements made by the tenant.
> **Explanation:** A leased fee interest is the ownership interest retained by the landlord in a leased property.
### What happens to the property interest when the lease term ends?
- [x] It reverts back to the landlord.
- [ ] It becomes tenant's property.
- [ ] The local government assumes control.
- [ ] A third-party financier inherits it.
> **Explanation:** Upon the lease term's conclusion, the reversionary interest brings back the property rights to the landlord.
### In what situation does the landlord's interest usually exclude?
- [ ] Insurance responsibilities.
- [ ] Utility management.
- [ ] Paying property taxes.
- [x] Tenant's rights during the lease term.
> **Explanation:** During the lease term, the tenant’s rights to use and occupy the property are exclusive to their lease agreement.
### Can a leased fee interest be sold independently?
- [x] Yes, with all income and future interests sold.
- [ ] No, only with leasehold interest.
- [ ] Yes, but only rental rights are transferred.
- [ ] Either interest transfer is prohibited.
> **Explanation:** Leased fee interests can be sold, complete with rental income rights and reversionary interest privileges remaining to the new owner.
### What primarily affects the leased fee valuation besides rental income?
- [ ] Property management standards.
- [ ] Overall area aesthetics.
- [ ] Construction materials used.
- [x] Reversionary value at lease end.
> **Explanation:** Leased fee valuation, aside from rental income, heavily relies on the estimated property's value (reversionary value) upon the lease ending.
### Difference between leased fee interest and leasehold interest mainly is?
- [ ] Duration of interest.
- [x] Rights retained by the landlord vs. rights granted to the tenant.
- [ ] Both reflect physical improvements on the property.
- [ ] Future investment returns.
> **Explanation:** Leased fee interest involves the landlord's rights and future interests, whereas leasehold is the tenant's rights under the lease.
### Why might a landowner opt to retain a leased fee interest instead of outright sale?
- [x] Steady rental income and long-term appreciation.
- [ ] Avoiding periodic lease renewals.
- [ ] Simplifying tenant responsibilities.
- [ ] No other selling opportunity.
> **Explanation:** Retaining leased fee can offer steady rental income and potential property value appreciation over time.
### What is a ground lease in the context of leased fee interest?
- [ ] Lease agreement limited to a short period.
- [x] Long-term lease usually for land use/development with ownership rights over improvements.
- [ ] Both parties share maintenance over the lease term.
- [ ] Transferable via subleasing opportunities only.
> **Explanation:** Inground leases provide long-term rights for land use and development, with improvements reverting to the landlord post-lease.
