A model discounts the supported market-minus-contract rent differential on matching expense terms over the remaining lease. What does that isolated present value represent?
Correct Answer
B) The tenant’s rent-benefit component of the leasehold.
The present value of market-minus-contract rent measures the tenant’s modeled rent-benefit component on matching expense terms. A stipulated dollar result need not establish total leasehold value; other rights, options, improvements and obligations may also matter. It is neither landlord contract receipts nor fee-simple value.
Why This Is the Correct Answer
Option B is correct because discounting the amount by which market rent exceeds contract rent over the remaining term measures the tenant's rent savings, which is the rent-benefit component of the leasehold. Leasehold value depends on the difference between contract and market rent and on the remaining term. Other rights, options or improvements could add to total leasehold value, so this figure is a component.
Why the Other Options Are Wrong
Option A: The whole landlord leased-fee value from contract receipts and reversion.
Option A says the figure is the whole landlord leased-fee value from contract receipts and reversion. The leased fee is valued from the contract rent and reversion, not from the market-minus-contract difference alone.
Option C: Functional obsolescence caused by the wording of the lease.
Option C calls it functional obsolescence caused by the lease wording. Functional obsolescence is a loss in value from design or utility problems in the improvements, not a rent differential under a lease.
Option D: The entire fee-simple ownership value of the property
Option D says it is the entire fee-simple value of the property. Fee simple value reflects the property at market rent without lease encumbrance, which is far more than the discounted rent difference.
Tenant's savings, tenant's value
If the tenant pays less than market, the savings belong to the tenant. Discount those savings and you have the tenant's rent benefit.
How to use: Use this to assign a market-minus-contract rent difference to the correct party.
Exam Tip
Identify whose side of the lease benefits from the rent difference before choosing which interest it measures.
Common Mistakes to Avoid
- -Assigning a below-market rent benefit to the landlord
- -Treating the rent differential as the full fee simple value
- -Calling a lease rent difference functional obsolescence
Concept Deep Dive
Analysis
This question tests what the present value of a positive market-minus-contract rent difference represents. When market rent exceeds contract rent, the tenant enjoys a rent advantage over the remaining term. Discounting that advantage measures the tenant's rent-benefit component of the leasehold, not the landlord's or the fee simple value.
Background Knowledge
The leasehold interest includes the tenant's rights of possession and use over the lease term. When contract rent is below market rent, the tenant gains a positive leasehold value whose size depends on the rent difference and the remaining term. The leasehold and leased fee together relate to the fee simple value.
Real-World Application
A tenant holds a long-term lease on a warehouse at rent well below current market. When the tenant considers assigning the lease, an appraiser discounts the monthly rent savings over the remaining term to estimate the rent-benefit portion of the leasehold.
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