A leased-fee DCF has a 10-year holding period. An enforceable anchor lease has 12 years remaining at fixed rent. What treatment is consistent with that interest?
Correct Answer
C) Include contract rent for the hold and reflect the 2 remaining lease years.
The 12-year anchor lease remains in force through the 10-year forecast and has 2 years left at sale. Include the contractual cash flows and reflect the remaining lease in the terminal buyer’s interest before any supported market-rent reversion. A sale at year 10 does not make the space vacant or erase the binding lease.
Why This Is the Correct Answer
Option C is correct because a leased fee interest includes the right to receive the rent stipulated in the lease. The anchor's contract rent belongs in the 10-year cash flows, and the reversion should reflect the 2 years still remaining on the lease before any supported shift to market rent.
Why the Other Options Are Wrong
Option A: Exclude the anchor tenant, because fixed rent cannot enter a DCF model.
Option A, excluding the anchor because fixed rent cannot enter a DCF, is mistaken; fixed contract rent is a routine DCF input. Excluding it would ignore income the leased fee owner is entitled to receive.
Option B: Assume the anchor space is vacant at year 10, despite the 12-year lease.
Option B, assuming the anchor space is vacant at year 10 despite the 12-year lease, ignores that the lease remains binding for 2 more years. A sale at year 10 does not end the lease or make the space vacant.
Option D: Use market rent from the start, despite the enforceable lease terms.
Option D, using market rent from the start despite the enforceable lease, values something closer to a fee simple interest. For a leased fee interest, the contract rent governs while the lease is in force.
Leases ride through the sale
A sale does not cancel a lease; the buyer inherits the remaining term, so the reversion must reflect it.
How to use: Use this when a lease term extends beyond a DCF holding period.
Exam Tip
Compare the lease term with the holding period; if the lease runs longer, contract rent continues into the reversion buyer's period.
Common Mistakes to Avoid
- -Replacing contract rent with market rent in a leased fee analysis
- -Assuming leases end when the property is sold
- -Excluding fixed-rent tenants from the cash flow
Concept Deep Dive
Analysis
This question tests how existing leases are handled in a leased fee DCF. The anchor lease runs 12 years, longer than the 10-year holding period, so its contract rent applies through the entire forecast. At the sale, a buyer would acquire the property subject to the 2 remaining lease years, which must be reflected in the reversion.
Background Knowledge
A leased fee interest is the lessor's interest: the right to receive contract rent and to recover the property at lease end. When contract rent differs from market rent, the leased fee value can differ from fee simple value. In a DCF, existing leases drive cash flows for their remaining terms, and the reversion reflects any lease still in place at sale.
Real-World Application
An appraiser values a shopping center whose grocery anchor has 12 years left at fixed rent. In a 10-year DCF, the appraiser models the anchor's contract rent each year and estimates the reversion considering the 2 remaining lease years.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
An operating statement separates base rent and already-effective ancillary real-estate income into distinct line items before totaling EGI. Where should separately collected parking receipts be classified?
Next Question
The subject property is a 50-year-old rental house with market rent of $2,300 per month. The only recent sales of rental houses in the market area involve houses built within the past 10 years, which rent for about the same amount and indicate a monthly gross rent multiplier of 210. How is applying 210 to the subject's rent most likely to affect the value indication?