A property's rent roll shows several units leased below the rest. Before projecting income the appraiser should:
Correct Answer
C) Determine whether those leases are below market and why
Why this is correct: In the income approach, the appraiser must analyze contract rents versus market rents. Determining why some units are leased below market (e.g., old lease, concessions, inferior unit) is essential to project future income accurately, whether using contract or market rent. Why the other choices are wrong: 'Exclude the below-market units from the income analysis' is incorrect; all leased space must be considered. 'Average all rents and apply the result' is wrong; it fails to analyze the cause of the variance. 'Assume the rents will rise at renewal' is an unsupported assumption; analysis must be based on evidence. Exam tip: Never blindly average rents. Analyze why each rent is what it is.
Why This Is the Correct Answer
Why this is correct: In the income approach, the appraiser must analyze contract rents versus market rents. Determining why some units are leased below market (e.g., old lease, concessions, inferior unit) is essential to project future income accurately, whether using contract or market rent. Why the other choices are wrong: 'Exclude the below-market units from the income analysis' is incorrect; all leased space must be considered. 'Average all rents and apply the result' is wrong; it fails to analyze the cause of the variance. 'Assume the rents will rise at renewal' is an unsupported assumption; analysis must be based on evidence. Exam tip: Never blindly average rents. Analyze why each rent is what it is.
More income-approach Questions
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In a DCF, what is the reversion?
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An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?