Fee Simple Ownership

Fee simple ownership is a term that translates to full ownership of real estate. Full ownership indicates that the owners can make alterations or additions to the designated area or property. The changes made are subjected to the laws of the land. 

This form of ownership does not restrict the freedom of the owners, provided they abide by the law. They are free to rent, use, sell, or pass the property to others. The rights are for an indefinite period but could be taxed according to the law prevailing at certain periods as enforced. 

Fee simple ownership is an arrangement where the owner is given complete and permanent ownership of a property. It is a comprehensive form of ownership where full control and rights are granted to the owners. This includes the ability to lease, sell and transfer. It also grants rights to build new structures, make additions and rent the property. Additionally, they can use it as collateral to obtain loans.  

The ownership is perpetual for an indefinite period. This means that the property ownership has no expiration date, and the owners can pass it down to generations. The ownership right can be availed of on both commercial and residential properties.  

The major advantage is freedom of use. Apart from this, there are also other benefits such as facilitation of economic growth, efficient use of land resources, etc. Owners can restrict usage and maintain privacy. With their full ownership rights, the owners have the opportunity to capitalize on their property fully. Any potential appreciation in the value of the property belongs to the owner, or if the owner wants it, could be passed to the designated heir. The local estate and zoning laws, however, restrict these advantages. 

There are predominantly two types: fee simple absolute and fee simple defeasible.   

#1 - Fee simple absolute  

Fee simple absolute is the complete form of ownership where the owner has unrestricted rights to the property. It can be transferred freely, sold or leased without limitations except for subjections to law. 

#2 - Fee simple defeasible 

Fee simple defeasible ownership is a unique arrangement that allows the free transfer of property without restrictions. However, the property will be reverted to the original owner if the other parties do not maintain or use it for a specific period. 

There are different types of this arrangement: fee simple subject to condition subsequent, fee simple determinable and those subject to executory limitation.  

The fee is simply subject to condition subsequent; the grantor has the option to take back the property. This means that the property does not automatically get reverted.   

#3 - Fee simple determinable 

Fee simple determinable arrangements require the granter to take definite action if the conditions are not met.  

#4 - Fee simple subject to executory limitation 

Under these arrangements, the ownership is transferred to a third party if the conditions are violated. These do not require much further action.   

Let us look at some of the examples to understand the concept better. 

Example #1

Imagine Dan is an individual who is an employee in a technology company. He earns a good amount of money as a salary, but a significant portion of his salary goes into paying rent. He decides to buy a loan to finance his idea of buying a home. Dan decides to take a drastic step such as this to secure a house in his name. He could become the fee simple owner and take control of the property. He can alter it to his taste and leave an appreciating asset for his kids. 

Example #2

Taxes, laws and duties may differ according to jurisdictions. Below are insights into the taxation of fee simple ownership appraisal by Napa County.

The law requires the use of unencumbered fee simple value when the properties are appraised. This value does not take zoning restrictions as encumbrances.   In most real estate transactions, the unencumbered fee simple interest is what is being transferred.  

Rules specify that sometimes properties may be subject to private encumbrances, as in the case of long-term leases. Here, the appraiser will adjust the sale price to consider the rights held by the lessee. Such taxes on property are levied to achieve equity and fairness. 

Given below are some of the advantages and disadvantages of the ownership arrangement 

Advantages 

• The arrangement provides maximum control to the owner.  
• It provides flexibility on real estate investments for the owners.  
• It provides freedom to the owners as they do not have to wait for approvals from a third party to make changes they desire on the property (as per the law). 
• It gives them an opportunity to earn a passive income through renting.  
• Diversifying into assets that give full ownership is a good diversifying investment strategy.  
• It can be used as collateral for loans.
• Fee simple ownership appraisal benefits belong to the owners.
• The property could be passed on to generations. 

Disadvantages 

• The fee simple ownership real estate arrangement does not provide freedom from payment of taxes.  
• Although it gives the freedom to make additions, the additions shall be made only in accordance with the laws of the land. 
• The arrangement gives the owners full freedom to restrict and keep people inside the property. However, it is not unlawful or illegal and certainly cannot be used as an excuse to deter law enforcement agencies.  
• After pledging the property, owners give rights to a third party to put a lien on it. The collateral asset can be confiscated if the loan is defaulted on. 
• Maintenance and upkeep costs can be high.

The differences between both the concepts are given as follows 

• Fee simple ownership real estate is an arrangement of absolute ownership in a property.  
• Leasehold ownership is an arrangement of ownership between the lessee and the fee simple owner. It is a contractual relationship entered for using the owner's property for a certain period.  
• In a fee-simple arrangement, the owner can enjoy the benefits of owning a property for an unrestricted period. In leasehold ownership, the lessee enjoys the benefits provided by the property until the lease term is over.  
• In a fee-simple arrangement, the owner has perpetual ownership. In leasehold ownership, the lease has temporary ownership.
• In a fee-simple arrangement, the owner has practically no restrictions. If at all, they are to be by the rules of the land. The rules or terms of the fee simple owner restrict the lessee in the lease ownership. 
• In a fee-simple arrangement, the owner has to pay property taxes but does not have to pay rent. In a leasehold ownership, the lessee has to pay rent and property taxes as specified in the agreement.  
• In fee simple ownership, any additions or alterations made to the property belong to the owner. In leasehold ownership, alterations and additions made to the property also belong to the owners, not the lessees.