A comparable that sold subject to an existing tenancy at below-market rent:
Correct Answer
C) Conveyed a leased fee, not a fee simple interest
Why this is correct: The 'rights conveyed' is a fundamental element of comparison. A property sold with a below-market lease in place conveys a leased fee interest (the right to the contract rent plus reversion). A typical market sale usually conveys a fee simple interest. Comparing them directly without adjustment is invalid. Why the other choices are wrong: A below-market rent typically depresses price, creating a discount, not a premium. A rights-conveyed adjustment is required. It can be compared, but an adjustment is needed. Exam tip: Always verify the rights conveyed by each comparable sale.
Why This Is the Correct Answer
A sale subject to an existing tenancy conveys the leased fee interest, not fee simple, because the buyer takes title burdened by the lease and receives only the contract rent until it expires. Identifying the interest correctly is the necessary first step, since a property rights adjustment must be made before the comparable can be measured against a subject appraised in fee simple. The below-market rent is what makes the difference material rather than nominal. Any adjustment that follows is derived by analyzing the present value of the rent differential over the remaining lease term.
Why the Other Options Are Wrong
Option A: Sold at a substantial premium because of the tenancy
A below-market lease reduces the income the buyer will receive, which depresses the leased fee value rather than creating a premium. A premium would arise from the opposite condition, a lease at above-market rent to a creditworthy tenant, which is why the direction here is the reverse of what the option claims. Candidates sometimes reason that an occupied building is worth more than an empty one, which is true in general but does not survive a rent that is below market.
Option B: Requires no rights-conveyed adjustment
A rights-conveyed adjustment is exactly what this situation requires, and skipping it would compare an encumbered interest to an unencumbered one as though they were the same asset. Property rights sits at the head of the adjustment sequence precisely because getting it wrong invalidates everything downstream. The option is only tempting if a candidate thinks of a lease as a management detail rather than as a division of the bundle of rights.
Option D: Cannot be compared to any other sale
The sale is comparable once the difference in rights is identified and adjusted, and leased fee sales are the ordinary currency of investment property appraisal. Refusing to compare would eliminate most commercial data from the market. Adjustment, not exclusion, is the answer whenever the difference is identifiable and quantifiable.
Rights Come First
Before size, before condition, before location, ask what was sold. Fee simple is the whole stick bundle. Leased fee is the bundle with the occupancy stick handed to a tenant and a rent check coming back. If the sticks differ, adjust before anything else.
How to use: When a stem mentions a lease, a tenant in place, or an income stream attached to a sale, answer in terms of leased fee versus fee simple. Then check whether the rent is above or below market to determine the direction of any adjustment.
Exam Tip
Keep the direction straight: contract rent below market discounts the leased fee, contract rent above market with a solid tenant enhances it. The tenant holds the advantage in the first case and the landlord in the second.
Common Mistakes to Avoid
- -Treating a leased fee sale as fee simple evidence with no rights adjustment
- -Getting the direction backwards and discounting for an above-market lease
- -Confusing leased fee, the landlord's interest, with leasehold, the tenant's interest
Concept Deep Dive
Analysis
Property rights conveyed is the first element of comparison in the standard adjustment sequence, and it comes first because rights define what was actually sold. Fee simple estate is absolute ownership subject only to the four governmental powers, unencumbered by any leases. Leased fee is the owner's interest when the property is subject to a lease: the right to receive the contract rent for the lease term plus the reversion of the property at expiration. Leasehold is the tenant's side of that arrangement. When a property sells with a lease in place, what changes hands is the leased fee, and its value depends on the contract rent rather than on market rent. A below-market lease means the buyer inherits an income stream smaller than market, so the leased fee normally sells at a discount to what the unencumbered fee would bring, and the gap is sometimes described as a leasehold advantage sitting with the tenant.
Background Knowledge
You need the bundle of rights and the definitions of fee simple, leased fee, and leasehold, plus the standard sequence in which property rights conveyed is adjusted first. You should also know how a rent differential is quantified, by discounting the difference between contract and market rent over the remaining term, and the meaning of the reversion.
Real-World Application
An appraiser valuing a small office building in fee simple finds a nearby sale encumbered by six remaining years at rent twenty percent under market. She discounts the annual rent shortfall over the remaining term, applies that present value as an upward property rights adjustment to the comparable, and states the interest appraised for both the subject and each sale.
More Sales Comparison Questions
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GLA differs by 210 sq ft between subject and comparable. Paired sales support $65 per sq ft of living area. The line adjustment is: