A certified general appraiser is developing a market-derived overall capitalization rate for an industrial warehouse using direct capitalization. She selects four comparable sales but excludes one because its lease included a tenant improvement allowance amortized over the lease term, causing the reported net operating income to understate the property’s sustainable operating income. Which USPAP standard most directly governs this exclusion decision?
Correct Answer
C) Standards Rule 1-4(b), which requires analysis of income and expenses to reflect market conditions
Standards Rule 1-4(b) states: 'When developing an opinion of value using the income approach, the appraiser must analyze the income and expenses to reflect market conditions.' This includes adjusting or excluding income data distorted by non-recurring items (e.g., TI allowances amortized into NOI), as such distortions prevent accurate reflection of sustainable, market-driven net operating income. While SR 1-4(c) addresses reliability of data sources, it does not specifically govern the adjustment of income for non-market lease concessions. SR 1-2(a) concerns physical and legal characteristics, not income stream integrity. SR 2-2(a) applies to reporting, not analysis. Thus, SR 1-4(b) is the controlling authority. This reflects the requirement in USPAP 2024–2025 Edition, p. 52.
Why This Is the Correct Answer
Standards Rule 1-4(b) states: 'When developing an opinion of value using the income approach, the appraiser must analyze the income and expenses to reflect market conditions.' This includes adjusting or excluding income data distorted by non-recurring items (e.g., TI allowances amortized into NOI), as such distortions prevent accurate reflection of sustainable, market-driven net operating income. While SR 1-4(c) addresses reliability of data sources, it does not specifically govern the adjustment of income for non-market lease concessions. SR 1-2(a) concerns physical and legal characteristics, not income stream integrity. SR 2-2(a) applies to reporting, not analysis. Thus, SR 1-4(b) is the controlling authority. This reflects the requirement in USPAP 2024–2025 Edition, p. 52.
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