Assume a transferable enforceable 20-year ground lease with identical expense terms and no offsetting conditions. Market ground rent is $35,000 versus $15,000 contract. What measures the tenant’s rent-benefit component?
Correct Answer
A) Present value of the supported $20,000 annual net rent savings over the term.
The stipulated below-market ground-rent benefit is a finite tenant cash-flow component, valued through its present value over the supported remaining term. Other rights, obligations and improvements can affect total leasehold value, and the land’s full fee-simple amount is not itself the tenant’s rent-benefit value.
Why This Is the Correct Answer
Option A is correct because the tenant's rent-benefit component is the present value of the $20,000 annual savings ($35,000 market rent less $15,000 contract rent) over the 20-year term. The size of a leasehold interest depends on the difference between contract and market rent and on the length of the remaining term. Discounting captures both, because savings received in later years are worth less today than savings received now.
Why the Other Options Are Wrong
Option B: The annual $15,000 payment alone as capital value.
Option B is wrong because the $15,000 contract payment is what the tenant pays, not what the tenant saves. Treating that payment alone as a capital value ignores the comparison with the $35,000 market rent, which is the source of the benefit.
Option C: The annual $35,000 market rent alone as capital value.
Option C is wrong because the $35,000 market rent alone describes what the land would rent for, not the tenant's advantage. The benefit comes from the $20,000 gap between market and contract rent, and that gap must be valued over the remaining term.
Option D: The entire fee-simple value of the land, as though the ground lease did not exist.
Option D is wrong because the entire fee-simple value of the land, as though the lease did not exist, measures the whole unencumbered land interest, not the tenant's rent savings. The tenant's rent-benefit component is only the present value of the below-market rent advantage for the lease term.
Gap times time, discounted
Find the rent gap (market minus contract), stretch it over the remaining term, then discount it to today. Gap, term, discount.
How to use: Use this whenever a question asks for the value of a below-market or above-market lease advantage.
Exam Tip
When a question asks about the value of a rent advantage, look for an answer that combines the market-versus-contract difference with the remaining term and present value.
Common Mistakes to Avoid
- -Capitalizing the contract rent itself as if it were the tenant's benefit
- -Ignoring the remaining lease term and treating the savings as perpetual
- -Using the land's full fee simple value as the tenant's interest
Concept Deep Dive
Analysis
This question tests how an appraiser isolates the value a tenant gains from paying below-market ground rent. The rent advantage is $35,000 market minus $15,000 contract, or $20,000 per year, and it lasts only for the remaining lease term. A finite stream of future savings is valued by discounting it to present value, not by capitalizing one rent figure or borrowing the land's fee simple value.
Background Knowledge
When a property is leased, the fee simple interest is divided into a leased fee held by the landlord and a leasehold held by the tenant. A leasehold has positive value when contract rent is below market rent, and its magnitude depends on the size of the rent difference and the remaining term. That difference is usually valued by discounting it to present value at a supported rate.
Real-World Application
An appraiser values a restaurant tenant's interest in a ground lease signed years ago at rent well below today's market level. She estimates current market ground rent, computes the annual savings, and discounts those savings over the remaining term to estimate the rent-benefit part of the leasehold. She then considers separately any improvements and other lease rights that also affect the tenant's position.
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