A certified general appraiser is valuing a regional shopping center subject to long-term triple-net leases. One anchor tenant occupies 40% of the GLA under a 12-year lease with fixed annual rent of $1.2 million; the remaining space is leased to smaller tenants at market rates, with rents projected to grow at 2.5% per year. The appraiser develops a discounted cash flow model with a 10-year holding period. Which statement best reflects the appropriate treatment of the anchor tenant’s rent in the DCF model?
Correct Answer
C) The anchor rent must be included as a fixed cash flow for 10 years, and the reversion must reflect the value of the space at market rent after lease expiration.
Per USPAP Standards Rule 1-4(b) and the Appraisal Institute’s *The Appraisal of Real Estate* (15th ed., Ch. 17), a DCF model must reflect the actual or anticipated cash flows over the holding period, including contractual rents, and the reversion must represent the property’s value at the end of the holding period assuming market conditions — i.e., vacant and available for lease at market rent. Excluding contractual rent (B, D) or capitalizing it separately (A) violates the integrated nature of DCF. Option C correctly incorporates the fixed rent during the holding period and recognizes that the reversion assumes market rent for the entire property post-holding period.
Why This Is the Correct Answer
Per USPAP Standards Rule 1-4(b) and the Appraisal Institute’s *The Appraisal of Real Estate* (15th ed., Ch. 17), a DCF model must reflect the actual or anticipated cash flows over the holding period, including contractual rents, and the reversion must represent the property’s value at the end of the holding period assuming market conditions — i.e., vacant and available for lease at market rent. Excluding contractual rent (B, D) or capitalizing it separately (A) violates the integrated nature of DCF. Option C correctly incorporates the fixed rent during the holding period and recognizes that the reversion assumes market rent for the entire property post-holding period.
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When analyzing income and expense data for a multi-tenant office building to develop an opinion of market value, an appraiser includes revenue from parking fees collected by the owner. In the appraiser's income and expense analysis, these parking fees should be treated as part of:
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Direct capitalization differs from yield capitalization (DCF) in that direct cap: