Fee Simple Title
Ownership of property is often described as a “bundle of rights.” Where the bundle is split, one person can hold the surface rights of a 100-acre parcel including the ability to build a structure, graze cattle, farm, etc. while another person holds the subsurface (or mineral) rights. The most complete type of ownership is known as fee simple ownership. The word fee comes from the word for cattle. Wealth in ancient times was often measured by the amount of livestock one owned. Other words associated with fee are fief, feudal and pecuniary. Thus, fee simple means the maximum interest in the property, being unqualified, of indefinite duration, freely transferable and inheritable.
When the certified appraisers of the assessor’s office value property for property tax purposes, the law requires that we use the “unencumbered fee simple” value of the property. Governmental restrictions such as zoning, flood plain designations, etc. are not considered to be an encumbrance and must be considered in arriving at a value. In most sales of homes and other properties, it is the unencumbered fee simple interest that transfers.
Private Encumbrance Example
However, in certain sales, the property is subject to a private encumbrance such as a debt or a lease. In valuing a property encumbered by a long-term lease, the property tax appraiser must adjust the sales price to compensate for the value of the rights in the property held by the lessee. Thus, if a property sells for $1,000,000 because a long-term (but less than 35 years) lease with below-market rents encumbers it, the appraiser must adjust the final value to recognize the positive value held by the lessee who enjoys an advantage over other persons leasing at current market rentals. The final value for property tax purposes might be $1,500,000.
On the other hand, if another property sells for $1,500,000 because the lessee was locked into a lease with above-market rents, we might reduce the enrolled value to $1,000,000 to account for the detriment to the lessee of paying above-market rents for an extended period of time. The appraiser uses comparable sales of like properties not encumbered by long-term leases to arrive at a final value.
Goal: Fairness & Equity
The goal of the property tax appraisal process is to achieve fairness and equity across all types of property. California law sets the standard for achieving that goal as the price at which a property, if exposed for sale in the open market with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other.