A landlord grants a 40-year ground lease, retaining specified ground rents and a verified terminal land reversion. Which interest and benefits are modeled?
Correct Answer
C) The landlord’s leased-fee interest, with its rent and stated terminal rights.
The landowner’s interest subject to the ground lease is leased fee. Value the supported contractual receipts, obligations and the terminal rights actually retained under the lease. Improvements do not universally revert to the lessor; that must be verified from contract terms.
Why This Is the Correct Answer
Option C is correct because the landowner's interest subject to a ground lease is the leased fee, which includes the right to receive the rent stipulated in the lease and the reversionary right at the end of the term. The model values the ground rents and the verified terminal land reversion.
Why the Other Options Are Wrong
Option A: Unencumbered fee-simple ownership ignoring the ground lease.
Option A proposes unencumbered fee simple ownership that ignores the ground lease. The land is encumbered by a 40-year lease, so the landlord's interest is limited by its terms and is not fee simple.
Option B: The ground tenant’s leasehold interest, because buildings exist.
Option B says the ground tenant's leasehold is modeled because buildings exist. The question asks about the landlord's retained rents and reversion; the leasehold is the tenant's separate interest.
Option D: An immediate right to possess the tenant improvements during the lease.
Option D claims an immediate right to possess the tenant improvements during the lease. The landlord has conveyed possession for the term; any right to improvements comes only at lease end and only if the contract provides it.
Fee owner gets the fees
The leased-fee owner collects the rent now and gets the property back later; the leasehold owner holds the use.
How to use: Use this to match the landlord to leased fee and the tenant to leasehold.
Exam Tip
Identify whose interest is being appraised before choosing a method; landlord equals leased fee, tenant equals leasehold.
Common Mistakes to Avoid
- -Valuing a ground-leased parcel as unencumbered fee simple
- -Assuming improvements revert to the landowner without checking the lease
- -Confusing the leased fee with the leasehold
Concept Deep Dive
Analysis
This question tests identification of the property interest held by a ground lessor. The landlord who leases land keeps the leased-fee interest: the right to the stipulated ground rent and the reversion at lease end. The appraisal models those contractual benefits and the terminal rights actually retained.
Background Knowledge
The leased fee is the lessor's interest, held subject to a lease that conveys use and occupancy to others; it includes the right to rent and the reversion. The leasehold is the lessee's interest. Whether improvements revert to the landowner depends on the lease terms.
Real-World Application
A pension fund owns land under a 40-year ground lease to a hotel developer. The appraiser values the fund's leased fee by discounting the contract ground rents and the land reversion, after reading the lease to see whether the hotel building reverts too.
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An appraiser is valuing a property with annual NOI of $120,000. The mortgage interest has a known value of $800,000 and a 7.5% annual mortgage constant, and the current dividend rate on equity is 12%. Using the equity residual technique, what is the total property value?
Next Question
An appraiser is verifying the sale of a fourplex. The buyer paid the seller $600,000 in cash, using a $450,000 market-rate bank loan and $150,000 of equity. Stabilized annual NOI is $42,000, annual debt service is $30,000 and annual pre-tax cash flow to equity is $12,000. What overall capitalization rate does this sale indicate?