Leased Fee vs. Leasehold: Valuing Property Subject to a Lease

Fee Simple, Leased Fee, and Leasehold Defined

Fee simple value assumes a property is unencumbered by any lease. The leased fee interest belongs to the landlord and reflects ownership subject to the rights of the tenant under the lease. The leasehold interest belongs to the tenant and reflects the value, if any, of the tenant's right to use the property under favorable lease terms.

Why Lease Terms Drive Value

The relationship between contract rent — the rent actually specified in the lease — and market rent — what the space would command if leased today — drives value for both interests. A lease with below-market rent shifts value away from the landlord's leased fee interest toward the tenant's leasehold interest, and vice versa.

Valuing the Leased Fee Interest

Appraisers value the leased fee interest by discounting the contract rent payments over the remaining lease term, along with the projected reversion to market rent at expiration, to a present value.

Valuing the Leasehold Interest

A leasehold interest carries positive value when contract rent is below market rent for the remaining lease term, since the tenant holds a favorable below-market position; when contract rent meets or exceeds market rent, the leasehold interest typically has little or no value.

Dunkin Advisors values leased fee and leasehold interests for financing, litigation, and lease-related engagements. Contact us to discuss your property's lease structure.