A building's contract rents average $1,100 while comparable units lease at $1,275. For a market value opinion, the income analysis normally uses:
Correct Answer
C) Market rent, with the contract shortfall analyzed separately
Why this is correct: Market value reflects typical market conditions. Therefore, market rent (what a typical owner could achieve) is used to project stabilized income. Existing below-market contract rents create a 'leased fee' interest; their impact is analyzed separately as a deduction from market value, not by averaging. Why the other choices are wrong: 'Contract rent alone' would undervalue the property if leases are below market. 'The higher of the two figures in every circumstance' would ignore the binding effect of below-market leases. 'An average of the contract and market rent' mixes two different concepts and is not standard practice. Exam tip: For market value, use market rent. Treat existing below-market leases as a separate negative adjustment.
Why This Is the Correct Answer
Why this is correct: Market value reflects typical market conditions. Therefore, market rent (what a typical owner could achieve) is used to project stabilized income. Existing below-market contract rents create a 'leased fee' interest; their impact is analyzed separately as a deduction from market value, not by averaging. Why the other choices are wrong: 'Contract rent alone' would undervalue the property if leases are below market. 'The higher of the two figures in every circumstance' would ignore the binding effect of below-market leases. 'An average of the contract and market rent' mixes two different concepts and is not standard practice. Exam tip: For market value, use market rent. Treat existing below-market leases as a separate negative adjustment.
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