Section 10: Reviewing the Appraisal of Lessee Interests

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The proper consideration of lessee interests by the appraiser should be carefully checked by the review appraiser since an appraisal of these interests will usually involve knowledge of the applicable laws, current administrative policy, as well as complicated appraisal techniques. A lessee’s interest may be in the form of ownership of an improvement(s), agricultural crops, minerals, a rent advantage, access roads, water lines, an advertising sign, or some other type of interest. All lease agreements should be made a part of the appraisal report. In most of the above cases, an appraisal will be prepared as though the lessee’s interests were all under the ownership of the fee holder.

Several of these lessee interests may require special handling and observation by the appraiser and review appraiser. For example, when mineral interests are involved, current state policy is not to purchase the oil, gas or sulfur that lie under the surface of the right of way. However, when an oil well is located on the part to be acquired, a study by a technical expert of the well and realty equipment in relationship to the value of the estimated oil reserves may be required (see Chapter 2, Section 4, Other Services). If the value of the oil reserves is less than the cost of a new oil well, then the value of the old oil well would not exceed the value of the reserves, since it would not be economically feasible to drill a new oil well outside the right of way to recover the remaining oil.

It is especially important for all concerned to have a clear understanding of the lease agreement, as well as the “intent” of the lessor and lessee. For example, the lessee may own the improvements on a special purpose property. However, the terms of the lease agreement may prevent both the whole property and remainder after from being used for their highest and best use, thereby reducing the value of the lessee’s interest. This reduction in value would not occur if the lessee were permitted, under the lease terms, to use the remainder after for its highest and best use. The matter would be complicated further if the remainder after were enhanced by the new facility, because then the lessor’s interest would be enhanced while the lessee’s interest is damaged.

It is also important to note that certain lease agreements now contain general or elaborate “condemnation” clauses that outline certain conditions for the lessor and lessee. These clauses (that range from the ratio of property acquired under the threat of condemnation, number or percentage of minimum parking spaces needed in the remainder after to conduct business/services, whether access is detrimentally changed, etc.) should also be studied carefully by appropriate personnel.

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