What typically causes lease fee value to be less than fee simple value?

The reason lease fee value is often less than fee simple value hinges on the nature of lease agreements and their inherent conditions. Specifically, during the term of a lease, adjustments such as rent concessions, periodic fixed rents, or market-based escalations can lead to a situation where the value associated with the lease does not equate to the potential value of owning the property outright, which is represented by the fee simple value.

In essence, fee simple ownership confers complete rights and a higher potential for income and flexibility regarding property use than a leased property does. Consequently, when adjustments occur that affect cash flows or the desirability of the lease, the lease fee value reflects those limitations or modifications, thereby making it lower than the fee simple value.

Market fluctuations can certainly impact values, and fixed lease agreements may create situations where the lease does not reflect current market conditions, but these factors do not inherently explain why lease fee values are commonly lower than fee simple values. Similarly, agreements set above market levels might even result in a lease fee value that exceeds the fee simple value, due to the potential for higher income generation from the property. Thus, the most accurate reasoning relates to ongoing adjustments during the lease term that create discrepancies in value.