An enforceable lease has annual contract rent of $22 per square foot against market rent of $28, with identical expense terms and no offsetting differences. What rent-benefit effect follows?
Correct Answer
D) A tenant rent advantage and lower lessor receipts relative to market rent.
Under the stipulated identical expense terms and enforceable remaining lease, contract rent $6 below market creates a tenant rent-benefit component and reduced lessor rental receipts relative to fee-simple market rent. It does not itself quantify total interest value; other rights, costs and term matter.
Why This Is the Correct Answer
Option D is correct because contract rent of $22 per square foot against market rent of $28 leaves a $6 shortfall that benefits the tenant. With identical expense terms and no offsetting differences, the lessor's rental receipts are lower than market. When contract rent is below market rent, the leased fee interest is worth less than the fee simple interest.
Why the Other Options Are Wrong
Option A: A rent reset to market at the next lease anniversary.
Option A assumes a rent reset to market at the next lease anniversary, but nothing in the facts provides such a clause. The enforceable lease keeps contract rent at $22 per square foot for its remaining term.
Option B: An automatic increase in lessor receipts above market rent.
Option B claims an increase in lessor receipts above market rent, which is the opposite of the facts. Contract rent of $22 is below market rent of $28, so lessor receipts are lower, not higher.
Option C: No effect, because enforceable contract rent can be ignored in valuation.
Option C says enforceable contract rent can be ignored in valuation, which is wrong. An enforceable lease binds the parties, and below-market contract rent reduces the leased fee value relative to the fee simple.
Below market favors the tenant
If the tenant pays less than market, the tenant gains the difference and the landlord gives it up. If the tenant pays more than market, the landlord gains.
How to use: Use this to decide which party benefits whenever contract and market rent differ.
Exam Tip
Identify whether contract rent is above or below market, then ask who gains the difference. Do not assume a lease resets or can be disregarded unless the facts say so.
Common Mistakes to Avoid
- -Ignoring enforceable lease terms when valuing the leased fee
- -Assuming below-market rent benefits the landlord
- -Assuming the rent resets to market without a lease provision
Concept Deep Dive
Analysis
This question tests the effect of contract rent below market rent under an enforceable lease. When contract rent is less than market rent, the tenant enjoys a rent advantage and the lessor receives less than market rent. The candidate must recognize that an enforceable lease binds the parties and affects the leased fee.
Background Knowledge
Contract rent is the actual rent specified in a lease, while market rent is the rate prevailing for comparable space. When contract rent is below market, the leased fee is worth less than the fee simple and the tenant may hold a positive leasehold interest. Quantifying the interests requires considering the remaining term and other lease terms.
Real-World Application
An appraiser values an office building where a tenant signed a long lease at $22 per square foot years ago, while current market rent is $28. She recognizes the leased fee is worth less than the fee simple and that the tenant holds a rent advantage for the remaining term.
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