Understanding Real Estate Rights

There a lot of ways one can hold rights in real estate. Here are some of the most common:

Fee Simple

You have probably heard the term fee simple before. Fee Simple is the highest possible ownership interest in real estate. If you own your home in fee simple, your ownership is only limited by:

  • Taxation – Ad Valorem (“According to Value”) taxes can be levied against your property.
  • Eminent Domain – the government can take all or part of your property if two elements are present: public purpose and just compensation.
  • Police Powers – various governmental powers that control the way you develop or maintain your property, like zoning ordinances, building codes and environmental regulations.
  • Escheat – If you die without a will or identifiable heirs, the ownership of your property reverts to the state.

Condominium

Condominium is a form of fee simple ownership in real estate where the use and ownership of a unit is conveyed along with rights to certain common elements. The ownership rights are typically spelled out in a condominium document, which defines the unit (for example, “from the paint in”) and the rights and responsibilities associated with the common elements.

Leased Fee

Leased fee is the fee simple ownership interest of the landlord / lessor conveyed to the tenant / lessee by a lease. The a typical written lease includes:

  • The rent, or periodic payment
  • The lease terms. The unit is often described (“Apartment 22” or “Office Suite 3 consisting of 2,200 square feet”) and rights to common elements (use of a swimming pool, use of common lavatories) are often detailed. Also described here is the lessor’s (tenant’s) responsibility to pay certain expenses such as real estate taxes, insurance, common area maintenance charges and utilities.
  • Lease Duration – Leases have a special characteristic in that they are limited in time.

Leases that are above market can create what is known as Leased Fee Value that inures to the landlord / lessor. For example: market rent is $5.00 per square foot and results in a value of $50 per square foot. The contract rent is $6.00 per square foot, which results in a value of $60 per square foot. The $10 per square foot difference is the Lease Fee Value.

Leasehold

Leasehold is the flip side of the Leased Fee coin: it is the ownership rights of the tenant / lessee.

Below market leases create Leasehold Value, which, depending on the duration of the lease, can be significant. Often a bankrupt retailer’s largest assets are leasehold interests that can be sold based on the present value of the below market lease.

For example, if a retail space is leased for 30 years at a rent that is $5.00 per square foot below market, assuming a 10% return, the buyer might be willing to pay $47.13 per square foot for the rights to the space.

Easement

Easements are certain rights to property granted to a another party. For example, access to a lot without road frontage can be granted by a property that has road frontage.

The permutations of easements is almost infinite. There are drainage easements, access easements, right-of-way easements, sight triangle easements, utility easements (above and below ground) and slope easements. Easements can be permanent or temporary.

In terms of valuation, easements are often valued as a percentage of the fee simple ownership based on the rights acquired.

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