efinitions of the termfee simple typically examining how the valuation profession focus on one of two things: the bundle of can modify its conceptual understanding of rights or the duration of the estate. A recent fee simple to better conform to how others Property Rights Symposium and the associated understand and use the term. Discussion Paper published by the Appraisal D A History Overview Institute brings to light a significant difference in how the term fee simple is customarily defined by appraisers and how it is defined by the legal profession and others The concept of "fee" dates back to the feudal in the real estate industry. This issue is important since social system of Medieval Europe, where a fief eminent domain and property taxation typically require was a property right granted by an overlord to valuation of the fee simple interest. It is therefore worth a vassal whose fealty (fee) required some type

30 Right of Way MAY/JUNE 2018 RETHINKING FEE SIMPLE Proposed changes to fee simple and leased fee definitions

BY MICHAEL V. SANDERS, MAI, SRA

would create interests in favor of Major Changes a lessor and lessee, but these were defined strictly in terms of the value It was the publication of the first attributed to the respective interests. edition of The Dictionary of Real The current definition in Black's Law Estate Appraisal in 1984 that Dictionary similarly recognizes fee produced the most profound simple as an inheritable estate and the change by redefining the termfee broadest possible property interest simple estate as "absolute ownership allowed by law, defining fee simple unencumbered by any other absolute as "an estate of indefinite or interest or estate; subject only to potentially infinite duration." the limitations of eminent domain, escheat, police power and taxation." In the 1962 edition of Appraisal Terminology and Handbook, the For the first time, fee simple was definition of fee simple was changed defined solely in terms of the interests by adding that it was limited by the associated with the estate (bundle governmental powers of eminent of rights), rather than the character domain, escheat, police power of the estate, such as inheritability and taxation. While defined as and indefinite duration. The leased "an inheritable estate," the revised fee estate was also redefined by definition subtly introduced the idea incorporating the prior definition that fee simple was also defined by of leased fee, resulting in a more limitations on the bundle of rights. expansive but functionally equivalent definition. The current edition of The The 1975 and 1982 editions of Dictionary of Real Estate Appraisal Real Estate Appraisal Terminology contains a nearly identical definition contained no changes to the of fee simple estate. The termleased of service in exchange. When feudal definition of fee simple, but added fee interest replaces leased fee estate land tenure disappeared in the 1600's, a new term called leased fee estate, but is still defined as "the ownership fiefs effectively became "simple" without which is defined as "the ownership interest held by the lessor, which conditions (fee simple). interest of the owner or landlord." includes the right to receive the This was significant because it created contract rent specified in the lease, An early definition of fee simple in the a new fee ownership estate defined plus the reversionary right when the 1950 edition of Appraisal Terminology solely by the bundle of rights—the lease expires." and Handbook is as follows: “An absolute right to receive rental income and a fee: a fee without limitation to any reversion at lease termination, with The terms "estate" and "interest" tend particular class of heirs or restrictions.” use and occupancy conveyed to a to be used interchangeably but legal The same text recognized that a lease tenant. definitions of these terms suggest

MAY/JUNE 2018 Right of Way 31 subtle differences. It might be helpful In Summary to think of estate as the character of ownership in terms of both possession The Uniform Standards of Professional and duration, while interest pertains to Appraisal Practice (USPAP) require rights in real property. In this context, appraisers to "identify . . . the real the estate is what is owned, while the property interest to be valued . . . interest is what has value. [including] any known easements, restrictions, encumbrances, leases, A New Definition reservations, covenants, contracts, declarations, special assessments, TheProperty Rights Symposium ordinances, or other items of a similar Discussion Paper proposes defining nature." Most valuation assignments fee simple estate in a manner more aim to appraise either the fee simple consistent with the legal definition: or leased fee interest, depending on “The highest estate allowed by law. An whether or not existing lease(s) are inheritable estate of indefinite duration.” considered in the valuation. But the The changes definition of fee simple has changed It is noteworthy that the new definition significantly over time, with the notion makes no mention of rights associated of a leased fee estate added to appraisal proposed are with fee simple ownership. Additionally, nomenclature in the 1970's. Appraisers' it comes with a proposal to discontinue current understanding of the terms fee use of the terms leased fee, leased fee simple and leased fee focuses primarily important estate and presumably leased fee interest. on the assumed bundle of rights rather Estates to be valued could include any of than the duration of the estate, as it the following: is commonly understood in the legal in bringing profession and elsewhere in the real • Fee Simple (indefinite duration; estate industry. alienable, devisable and consistency descendible) The changes proposed are important in bringing consistency to the definition • Life Estate (ownership for the of fee simple, discontinuing use of to the duration of a person's life) the term leased fee, and encouraging appraisers to be more specific regarding • Leasehold (tenancy for a periodic the ownership estate and associated definition of or specific time, or terminable at property rights, including actual or will) assumed encumbrances on the interest appraised. J fee simple... In addition to specification of the estate, the new paradigm would also require appraisers to specify the interest to be valued, including any claims or limitations by other parties. What was previously identified as leased fee would now be described as "fee simple subject to existing lease(s)." This has the advantage of allowing the appraiser to be very specific about the interest to be valued and any assumptions to be incorporated. For example, a vacant property could be appraised as fee simple assuming market rent or as vacant and available for lease or occupancy. Similarly, a property could be appraised subject to specific Michael V. Sanders, MAI, SRA is principal of encumbrances or restrictions that might Coastline Realty Advisors, based in Southern California. His practice specializes in real estate affect the valuation. Other interests can damage economics, consulting and litigation support. also be specified and valued, including He has authored articles published by Right of easements, remainders and fractional Way Magazine, the Appraisal Institute and other interests. publications.

32 Right of Way MAY/JUNE 2018