A tenant’s rent-benefit component is being analyzed, holding other rights and obligations equal. Which comparison most directly establishes that component?
Correct Answer
B) Market versus contract rent on matching terms for the remaining period.
Compare market and contract cash flows on compatible expense and rights bases to analyze the rent-benefit component. Total leasehold value can also reflect improvement use, options and other obligations; it is not created entirely by current rent difference. A sunk improvement cost alone does not establish recoverable value.
Why This Is the Correct Answer
Option B is correct because comparing projected market rent with contract rent on matching terms over the remaining period directly measures the tenant's rent advantage. An above- or below-market lease adjustment can be estimated by discounting the difference between market and contract rent over the remaining term. Matching the expense and rights basis keeps the comparison valid.
Why the Other Options Are Wrong
Option A: The landlord’s debt-service rate on the property loan alone.
Option A is wrong because the landlord's debt-service rate on the property loan alone is a financing term between landlord and lender. It says nothing about the difference between what the tenant pays and what the space would rent for.
Option C: The tenant’s historical improvement expenditure alone.
Option C is wrong because the tenant's historical improvement expenditure alone is a sunk cost and does not measure rent benefit. A past cost does not by itself establish recoverable value, and it does not compare market and contract rent.
Option D: A property capitalization rate applied without comparing lease cash flows.
Option D is wrong because applying a property capitalization rate without comparing lease cash flows skips the very comparison that creates the benefit. The rent-benefit component depends on the gap between market and contract rent over the remaining term.
Benefit equals market minus contract
The tenant's rent benefit is the market-minus-contract gap, measured over the remaining term on matching terms.
How to use: Use this to pick the answer that compares the two rent streams directly.
Exam Tip
Look for the choice that compares market and contract rent on the same terms over the remaining term.
Common Mistakes to Avoid
- -Using the landlord's loan terms to measure the tenant's benefit
- -Treating the tenant's past improvement costs as the value of the lease
- -Comparing rents on different expense bases
Concept Deep Dive
Analysis
This question tests how the tenant's rent-benefit component is measured. The benefit arises when contract rent is below market rent, so the direct comparison is projected market rent versus contract rent on matching terms over the remaining period. Financing rates, sunk costs or a cap rate applied without comparing lease cash flows do not isolate that benefit.
Background Knowledge
A leasehold interest gains value when the tenant pays less than market rent. The rent-benefit part of that value is measured by projecting the rent difference over the remaining term and discounting it. Total leasehold value can also reflect improvements, options and other obligations.
Real-World Application
A lender asks an appraiser to estimate the value of a tenant's favorable lease on a warehouse. She confirms both rents are on the same net basis, projects the annual difference to lease expiration, and discounts it. She then notes separately any value from renewal options.
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
Which best distinguishes market rent from contract rent?
Next Question
An appraiser is developing a monthly gross rent multiplier for a rental house with market rent of $2,400. Three recent cash sales of similar single rental houses indicate multipliers of 200, 205 and 210. In the same period, an investor paid $2,520,000 cash in one transaction for a seller's six similar rental houses, each renting for $2,400 per month. Market conditions were stable throughout. How should the appraiser treat the six-house sale?