Language of Real Estate Uncategorized

Leased Fee vs. Leasehold

Leased Fee vs. Leasehold

The leasehold is the lessee’s interest, whereas the leased fee is the landlord’s interest represented by the value of the remaining rent plus the reversion.

Leased Fee — The interest and rights of the lessor in real estate that the lessor has leased. The lessor has a right to receive rental income and a right to possess the property at the end of the lease. The value of the rental payments plus the remaining property value at the end of the lease period (the reversionary interest) is the leased fee interest, which may be sold or mortgaged subject to the rights of the tenant. In valuing the leased fee, the appraiser usually capitalizes the present value of the income received by the lessor and adds the reversionary value of the land, or land and building, at the expiration of the lease term (the annuity method of capitalization). The reversionary worth of the land is difficult to predict so it is usually calculated to be the same as its present value, discounted to its present worth by multiplying the value by the appropriate Inwood factor.

Leasehold — A less-than-freehold estate that a tenant possesses in real property. Under a lease, the tenant possesses a leasehold, and the landlord possesses the reversion estate. (That is, when the lease terminates, the property reverts to the landlord.) Leasehold estates are generally classified as estates in personal property. Some states, however, provide for certain leasehold estates to be considered as real property while also retaining their characteristics as personal property. Under common law, an estate for years was termed a “chattel real” and classified as personal property. The four principal types of leasehold estates are the estate for years, the periodic tenancy (estate from year to year), the tenancy at will and the tenancy at sufferance. The estate for years runs for a specific period of time; the periodic tenancy runs for an indefinite number of time periods; the estate at will runs for an indefinite time; an estate at sufferance runs until the landlord takes some action.

Unlike other uses of land, the leasehold is a transfer of the exclusive right to possession, as opposed to the mere privilege to use the land. Thus, a hotel guest is different from a tenant. The significance between various types of authorized usages of property (licenses, easements, profits and leases) becomes important in terms of the remedies available upon breach of contract. The tenant in a leasehold can be removed from the property only by strict statutory eviction procedures, whereas a license usually can be revoked at any time.

The term or duration of the leasehold estate varies, depending on the purposes of use of the land. Many residential apartment leases are short term, that is, for one year or from month to month. Most ground leases usually run for 55 years, whereas some run for 75 years or longer. For FHA leasehold-mortgage purposes, leases must have a minimum term that exceeds the fixed rental term of the loan. These long-term leases are transferred by assignment of lease rather than by deed. Both the assignor and assignee of a leasehold estate must sign the assignment of lease, because the assignee assumes the obligations of the assignor under the lease.

Under common law, improvements constructed by the lessee on the leased premises would revert to the landlord at termination of the leasehold estate. Many ground leases, however, specifically provide in the reversion clause for the right of the lessee to remove all improvements at the end of the lease term. This provision simplifies the arrangement of financing and negotiation for lease extension or renewal.

The valuation of a leasehold interest is a complex procedure that involves the use of capitalization rates and present value tables to ascertain the present value of the lessee’s interest. In comparing properties for valuation purposes, leaseholds should be compared only with other leaseholds and not with fee simple properties.

In areas where leaseholds are popular, such as Hawaii and Maryland, it is common practice to make leasehold estates subject to a recorded declaration of restrictions, usually by reference in the lease to the book and page number of the declaration. A purchaser should examine the lease and all referenced documents well in advance of closing in order to ascertain exactly what he or she is buying.

You may also like
Foreclosure vs. Forfeiture
highest and best use