Some units have lower contract rent than others. What should be checked before forecasting?
Correct Answer
C) Test if lease dates, unit traits or concessions explain gaps.
Investigate whether the differing rents reflect lease dates, concessions, unit differences or other causes before projection. Lower rent than other units does not itself prove below-market rent. Do not assume automatic renewal increases or omit actual leased space.
Why This Is the Correct Answer
Option C is correct because rent differences among units can reflect market rent changes over time, physical differences between units, concessions or lease terms. Identifying the cause tells the appraiser whether a rent is at market and how it may change over the forecast.
Why the Other Options Are Wrong
Option A: Exclude the lower-rent units from the income analysis.
Option A is wrong because excluding the lower-rent units removes actual leased space from the analysis. Those units produce income and must be accounted for in the forecast.
Option B: Average all of the rents without examining why they differ.
Option B is wrong because averaging the rents without examining why they differ can hide below-market leases, concessions or unit differences. The reasons for the gaps affect the forecast.
Option D: Assume the rents rise to the highest level at each lease renewal.
Option D is wrong because assuming each lower rent rises to the highest level at renewal is unsupported. Renewal rents should reflect market evidence for each unit type, not the top rent in the building.
Ask why before you average
Find out why rents differ before deciding whether they are at market or how they will change.
How to use: Use this whenever a rent roll shows units with different rents.
Exam Tip
Prefer the answer that investigates the cause of a rent difference rather than ignoring, averaging or assuming it away.
Common Mistakes to Avoid
- -Dropping lower-rent units from the income analysis
- -Averaging rents without investigating differences
- -Assuming all rents jump to the building's highest rent at renewal
Concept Deep Dive
Analysis
This question tests rent analysis before forecasting income. When some units rent for less, the appraiser should investigate why before projecting future income. The causes may be lease dates, concessions, unit differences or lease terms, and a lower rent does not by itself prove the unit is below market.
Background Knowledge
Rent roll analysis compares contract rents to market rents and identifies the reasons for differences. Concessions, older leases, unit size or quality, and lease terms can all cause variation. Understanding these causes supports reasonable forecasts of future income.
Real-World Application
An appraiser reviewing a fourplex rent roll sees that two units rent well below the others. Checking lease dates and unit features, the appraiser finds those leases were signed before a market rent increase and adjusts the forecast as those leases roll over.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
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Next Question
The subject property is a duplex with a failing roof. Tenants currently pay reduced rents, and annual NOI is $26,400. Once the roof is replaced, market rents apply and annual NOI will be $30,000. The replacement costs $25,000, can be done at once with no loss of rent, and is what buyers of similar duplexes would do. Sales of similar duplexes in good repair indicate a 7.5% overall rate. Which calculation indicates the as-is fee simple value?