A landlord owns property subject to a lease under which the tenant pays base rent and specified property costs. What ownership interest is the landlord appraising, subject to that lease?
Correct Answer
D) The leased-fee interest.
The landlord's ownership subject to the lease is the leased-fee interest. The tenant holds leasehold rights. Expense allocation affects expected receipts and obligations but does not reverse the parties' interests.
Why This Is the Correct Answer
Option D is correct because the landlord's ownership subject to the lease is the leased-fee interest. The leased fee carries the right to receive the rent stipulated in the lease and to recover the property at the end of the term. The tenant's payment of specified costs affects the landlord's net income but does not change the interest held.
Why the Other Options Are Wrong
Option A: A tenant’s leasehold interest.
Option A, a tenant's leasehold interest, is the right held by the tenant to use and occupy the property under the lease. The landlord does not hold the leasehold.
Option B: A life estate created by paying operating costs.
Option B, a life estate created by paying operating costs, is incorrect because a life estate is measured by a person's lifetime and is not created by paying property costs under a lease.
Option C: An unleased fee-simple interest that disregards the lease.
Option C, an unleased fee-simple interest that disregards the lease, does not describe the landlord's interest subject to the lease. Fee simple is ownership unencumbered by other interests, but this property is encumbered by the lease.
Landlord leased fee, tenant leasehold
The landlord keeps the fee and leases it out, so the landlord holds the leased fee; the tenant holds the leasehold.
How to use: Use this to match parties to property interests in lease questions.
Exam Tip
Identify the party first, then the interest; expense allocation details do not change which interest each party holds.
Common Mistakes to Avoid
- -Calling the landlord's interest a leasehold
- -Valuing fee simple when the leased fee is the interest appraised
- -Thinking expense pass-throughs change the ownership interest
Concept Deep Dive
Analysis
This question tests identifying the ownership interest of a landlord whose property is subject to a lease. The landlord holds the leased-fee interest, while the tenant holds the leasehold interest. How expenses are allocated affects income but does not change which party holds which interest.
Background Knowledge
Fee simple is ownership unencumbered by other interests. When a lease is in place, ownership is divided into the landlord's leased-fee interest and the tenant's leasehold interest, and appraisers must identify which interest is being valued.
Real-World Application
A lender orders an appraisal of a net-leased drugstore owned by an investor. The appraiser identifies the property rights appraised as the leased-fee interest and values the contract rent and reversion accordingly.
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