The appraisal and negotiation of leased property should follow the prescribed procedure of offering the approved value to the fee owner with the requirement that the owner secure a release from the lessee. However, in the situation where the lessee has an ownership interest in the real estate that is being acquired or damaged in an acquisition project, the acquiring agency may separately negotiate and close with the fee owner and lessee.

The appraiser should inquire if the lessee owns any of the improvements of the leased property. If possible, the appraiser should obtain a copy of the lease for the property being appraised. In all cases, the appraiser will review the terms and conditions of the lease and disclose this information in the appraisal report. In the situation when the lessee is seeking compensation for owned improvements, the owner must execute a disclaimer regarding the lessee’s improvements. If the above requirements are not met, all the property will be appraised and the total value will be offered to the fee owner.

The situation of leased estates such as a leased fee estate and leasehold estate may exist in leased property and be compensable in the acquisition of property. These estates are created by favorable rent requirements in lease agreements that benefit the lessor or lessee. The leased fee estate may exist when the lessor has a lease that provides for contract rent that is greater than the market rent of a property. The leasehold estate is the opposite situation, when a lessee has a lease with contract rent that is less than the market rent for the leased property. If the acquisition of a property extinguishes or damages these estates, the fee owner or lessor, or the lessee may be entitled to compensation for their loss.

The valuation of lease estates of a property is a procedure of separating the market value of the real estate into a value for the leased fee estate and a value for the leasehold estate. As the appraisal of lease estates is a common procedure for appraisers, the appraisal should utilize recognized methods and techniques that meet industry standards. However, the total value for the real estate and lease estates must not exceed the market value of the parcel being appraised.

For additional information on lessor-lessee interests, please refer to the

ROW Acquisition Manual

, .