A leased-fee assignment concerns an enforceable lease with 12 years left at $24/sf annually versus $18 current market rent. There are no renewal options; post-expiration reletting is supported. What cash-flow framework fits this interest?
Correct Answer
D) Contract receipts for the remaining term and supported post-expiration benefits and costs.
For the stipulated leased-fee interest, model enforceable rent over its remaining 12 years and the verified post-expiration rights and market reversion. Do not extend an excess-rent premium perpetually or erase the lease at the sale date. The specified interest drives the analysis; no estate-tax legal conclusion is needed here.
Why This Is the Correct Answer
Option D is correct because the leased-fee interest receives the enforceable contract rent over the remaining 12-year term plus the supported benefits and costs after expiration, including reletting and reversion. The above-market difference lasts only for the remaining lease term. Modeling both periods reflects the rights actually held.
Why the Other Options Are Wrong
Option A: Contract rent continued perpetually, without considering the lease expiration or reletting.
Option A continues the $24/sf contract rent perpetually and ignores lease expiration and reletting. The lease ends in 12 years with no renewal options, so the above-market rent cannot be assumed to continue beyond that term.
Option B: Market rent immediately while ignoring the enforceable contract.
Option B uses market rent immediately and ignores the enforceable contract. The leased-fee owner is entitled to the higher contract rent for the remaining 12 years, so dropping it understates the interest being appraised.
Option C: Value as vacant, since the assignment concerns a transfer.
Option C values the property as vacant because a transfer is involved. A sale does not erase an enforceable lease; the leased-fee interest is valued subject to the existing lease.
Contract now, market later
For a leased fee, collect the contract rent until the lease ends, then switch to market rent. The lease's premium or discount has an expiration date.
How to use: Use this to build any leased-fee cash flow where contract and market rent differ.
Exam Tip
When contract and market rent differ, pick the answer that respects both the remaining lease term and what happens after it ends.
Common Mistakes to Avoid
- -Capitalizing above-market contract rent into perpetuity
- -Ignoring an enforceable lease and using market rent from day one
- -Treating a sale as if it ends the existing lease
Concept Deep Dive
Analysis
This question tests matching the cash-flow model to the leased-fee interest when contract rent exceeds market rent. The landlord is entitled to the enforceable contract rent for the remaining 12 years, after which the space is relet at market terms. The correct framework captures both periods rather than extending the above-market rent forever or ignoring the lease.
Background Knowledge
The leased fee is the landlord's interest in a property subject to a lease, and its value depends on contract rent, remaining term and the reversion. Above- or below-market leases can be measured by discounting the difference between market and contract rent over the remaining term. After the lease ends, the property is expected to earn market rent.
Real-World Application
An appraiser values a retail building leased to a tenant paying well above current market rent with 12 years left. The discounted cash flow uses the contract rent through expiration, then projects downtime, leasing costs and market rent for the reversion.
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Previous Question
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
Next Question
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