A commercial property has a net operating income of $125,000 and is subject to a ground lease with annual rent of $15,000. What is the income attributable to the leased fee interest?
Correct Answer
D) $15,000
In a ground lease situation, the leased fee interest (land owner) receives only the ground rent, which is $15,000 annually. The building improvements and their income belong to the leasehold interest (tenant).
Why This Is the Correct Answer
The leased fee interest represents the land owner's position in a ground lease arrangement. The land owner's only source of income from this arrangement is the contractual ground rent payment they receive from the tenant. In this case, that ground rent is $15,000 annually, which constitutes the entire income stream attributable to the leased fee interest. The land owner has no claim to the property's operating income beyond this fixed rent payment.
Why the Other Options Are Wrong
Option A: $110,000
$110,000 represents the income that would flow to the leasehold interest (tenant), calculated as NOI minus ground rent ($125,000 - $15,000), not the leased fee interest.
Option B: $125,000
$125,000 is the total net operating income of the property, but this belongs to the leasehold interest (tenant), not the leased fee interest (land owner).
Option C: $140,000
$140,000 would incorrectly add the ground rent to the NOI ($125,000 + $15,000), which double-counts the ground rent and doesn't represent any actual interest's income.
Ground Rent = Land Lord's Only Income
Remember 'GROLI' - Ground Rent Only for Land-lord Income. In ground leases, the land owner (leased fee) gets ONLY the ground rent, nothing more from operations.
How to use: When you see a ground lease question asking about leased fee income, immediately look for the ground rent amount and ignore all other income figures - that's your answer.
Exam Tip
Always identify whether the question is asking about leased fee interest (land owner) or leasehold interest (tenant) - they have completely different income streams in ground lease scenarios.
Common Mistakes to Avoid
- -Confusing leased fee income with leasehold income
- -Adding ground rent to NOI instead of recognizing it as the land owner's sole income
- -Thinking the land owner gets a portion of the operating income beyond ground rent
Concept Deep Dive
Analysis
This question tests understanding of ground lease arrangements and how income is allocated between different property interests. In a ground lease, the property ownership is divided into two distinct interests: the leased fee interest (land owner) and the leasehold interest (tenant who owns improvements). The land owner receives only the contractual ground rent, while the tenant receives all operating income from the property minus the ground rent they must pay. This separation of interests is fundamental to understanding how income flows in ground lease situations.
Background Knowledge
Ground leases create a separation between land ownership (leased fee) and building ownership (leasehold), with each interest having distinct income streams. The leased fee interest receives only the contractual ground rent, while the leasehold interest receives the property's operating income minus the ground rent obligation.
Real-World Application
Common in urban areas where developers lease land long-term to build shopping centers or office buildings. The land owner receives steady ground rent while the developer operates the property and keeps operational profits after paying the ground rent.
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