The principal estates in property are free-hold (of which, fee simple is the most
commonly used type and hence practically synonymous) and leasehold, each having
their respective rights and risks. The rights of a freehold estate include the right to
alter or sell the property, to receive the benefit of appreciation in value, to claim tax
depreciation, and to create leasehold estates and benefit from the related rent. The risks
of the freehold estate include the risk of destruction and damage, of depreciation in
value, and of the economic costs of owning and operating property. When the freehold
estate owner uses its right to create a lease-hold estate and benefit from the related rent,
the owner has also, historically, retained the related financial risks of ownership. These
rights and risks are theoretically held in balance.
Prudent corporate real estate management considers the rights and risks of the freehold
and leasehold estates as they may support or detract from the competitive advantage of
the enterprise. Enterprises that deliberately choose to take a leasehold estate in property
are presumptively electing to avoid the risks, and to forgo the rights, of a freehold estate.
These enterprises are demonstrating they are ‘not in the real estate business’ and assume
that holding a leasehold estate obviates the risks of a freehold estate.