Property Valuation Methods: Leased fee vs. fee simple

Case Study: An investor client in Riverside County California purchased an office building anticipating the above – market rental income of the existing tenants. The purchase price reflected not only the value of the building but also the value of the lease, and the assessor put the entire amount on the property tax roll.

building1This is a good example of an opportunity to get a permanent “base year” reduction because the property was valued using a “leased fee” method, whereas assessed values are required to use fee simple valuation methods.

Issue 1: The value of the building should be based on fair market rental income at the time of purchase and not the rental income of the existing tenants.

Issue 2: In order to appeal the initial assessed value, the appeal must be filed within 60 days of the of the notice received from the assessor or property tax bill, or within three years after the amount is put on the roll.

  • If you file within the 60 day period, the reduction will be effective as of the purchase date.
  • If you file in the three years after this, the reduction is effective beginning in the year that you file your appeal.

Unfortunately, this client did not engage me until it was too late to get the permanent reduction in assessed value.

We were however able to get annual reductions under Proposition 8, which benefited my client greatly, but the permanent reduction would have meant only one appeal would have been necessary.

If you paid more than market value because of existing leases, or because you were in a hurry to replace property after a 1031 exchange, or for any other reason, please contact us to discuss how we can help you.

Bill Snyder CPA