A property is leased at $22 per square foot when market rent is $28. The difference creates:
Correct Answer
D) A leasehold advantage to the tenant, reducing the leased fee value
Why this is correct: The governing concept is that a lease with a contract rent below market rent creates a leasehold estate, which is an advantage for the tenant. This advantage is a separate, valuable interest that reduces the value of the owner's leased fee estate. The original explanation correctly states the $6 per foot bargain leaves the owner's interest. Applying this, the leased fee value is lower than the fee simple value because a buyer would pay less for the property subject to this below-market lease. Why the other choices are wrong: 'A required rent increase at the next anniversary date' is wrong because lease terms are fixed by contract; rent does not automatically increase to market rate. 'An immediate increase in the property's leased fee value' is wrong because a below-market lease decreases, not increases, the leased fee value. 'No effect, since only market rent matters for valuation' is wrong because the actual contract rent, not just market rent, determines the cash flow to the leased fee owner, directly impacting value. Exam tip: Remember: Below-market lease = leasehold advantage (tenant benefit) = leased fee value penalty.
Why This Is the Correct Answer
Why this is correct: The governing concept is that a lease with a contract rent below market rent creates a leasehold estate, which is an advantage for the tenant. This advantage is a separate, valuable interest that reduces the value of the owner's leased fee estate. The original explanation correctly states the $6 per foot bargain leaves the owner's interest. Applying this, the leased fee value is lower than the fee simple value because a buyer would pay less for the property subject to this below-market lease. Why the other choices are wrong: 'A required rent increase at the next anniversary date' is wrong because lease terms are fixed by contract; rent does not automatically increase to market rate. 'An immediate increase in the property's leased fee value' is wrong because a below-market lease decreases, not increases, the leased fee value. 'No effect, since only market rent matters for valuation' is wrong because the actual contract rent, not just market rent, determines the cash flow to the leased fee owner, directly impacting value. Exam tip: Remember: Below-market lease = leasehold advantage (tenant benefit) = leased fee value penalty.
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