A property under a ground lease produces total NOI of $125,000 before ground rent. The landowner's only current cash receipt is a fixed annual ground rent of $15,000, and the ground lessee keeps the remaining operating income. What current annual income is attributable to the landowner's leased-fee interest?
Correct Answer
D) $15,000 of annual ground rent.
The landowner’s current receipts are limited to ground rent. The lessee’s remaining property cash flow and any future reversion are separate interests or periods. This is not a universal rule that every leased-fee interest consists only of ground rent.
Why This Is the Correct Answer
Option D is correct because the landowner's only current cash receipt is the $15,000 fixed annual ground rent. Ground rent is the rent paid for the use of land, and the lessee retains the remaining operating income, so the leased-fee interest's current annual income is $15,000.
Why the Other Options Are Wrong
Option A: $140,000, ground rent added to the $125,000 NOI.
Option A, $140,000, adds the $15,000 ground rent to the $125,000 NOI. The ground rent is paid out of the property's NOI, so adding it double counts income and mixes the two interests.
Option B: $110,000 of income retained by the ground lessee.
Option B, $110,000, is the income retained by the ground lessee ($125,000 − $15,000). That belongs to the leasehold interest, not the landowner's leased fee.
Option C: $125,000 of total property NOI before ground rent.
Option C, $125,000, is total property NOI before ground rent, which is shared between the lessor and the lessee. The landowner receives only the $15,000 ground rent of that total.
Landowner gets the ground rent
In a ground lease, the land's owner collects ground rent now; the tenant keeps what the building earns after paying it.
How to use: Use it to assign each income stream to the correct interest.
Exam Tip
Identify which interest is being valued before choosing an income figure; total property NOI is not automatically the income of either party.
Common Mistakes to Avoid
- -Using total property NOI as the leased-fee income
- -Adding ground rent to NOI
- -Assigning the lessee's retained income to the landowner
Concept Deep Dive
Analysis
This question tests separating the income streams of a ground lease. The leased fee belongs to the landowner, who receives ground rent; the leasehold belongs to the ground lessee, who keeps the property income after paying ground rent. Here, the landowner's current income is the ground rent.
Background Knowledge
A ground lease divides interests: the lessor holds the leased fee and receives ground rent plus the right to the land at lease end, while the lessee holds the leasehold and the improvements' income after ground rent. Income must be allocated to the specific interest being appraised.
Real-World Application
An appraiser is asked to value the land owner's leased-fee interest under a long-term ground lease beneath a hotel. The appraiser capitalizes or discounts the contract ground rent and the land reversion, not the hotel's full operating income.
More Income Approach Questions
A local zoning ordinance allows these maximum densities: R-1, 4 units per acre; R-2, 8 units per acre; R-4, 20 units per acre; PUD (with approval), 12 units per acre. Which category allows the highest density?
What design advantage is commonly associated with post-and-beam construction?
A hypothetical local ordinance permits either a single-family house or duplex on the site. The existing single-family house complies with all current rules. Which statement is supported?
A zoning variance allowing a reduced side setback is granted for a parcel. After the parcel is sold, who generally holds the benefit of the variance, subject to its conditions?
Under ANSI Z765-2021 as applied by Fannie Mae, a staircase runs from the second floor down to the first floor. Its area is counted as part of:
Under ANSI Z765-2021, as Fannie Mae requires for a detached house, where are exterior dimensions taken on a brick-veneer wall?
A building's HVAC system would be classified as which type of building component?
A home on a large tract is valued at $620,000 including the land it needs. The remaining excess land could be sold separately and contributes a net $95,000 after separation costs. What is the total indicated value?
A covered sale concerns a residence built in 1965. Which hazard is the subject of the federal pre 1978 housing disclosure rule, without assuming its actual presence?
Which site characteristic is most likely to reduce site utility by restricting where a typical dwelling can be placed?
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