Concessions such as free rent offered to new tenants should be treated in the income analysis as:
Correct Answer
D) A reduction in effective income over the lease term
Why this is correct: Concessions like free rent are not an addition to income or a one-time expense. They represent a discount on the contract rent, reducing the actual cash flow the property generates. The governing principle is that effective gross income must reflect the true economic rent. For example, three months free on a three-year lease means the annual effective rent is lower than the stated contract rent. This reduction must be recognized over the entire lease term for an accurate income analysis. Why the other choices are wrong: 'An addition to potential gross income' is wrong because concessions reduce, not increase, the income actually received. 'An operating expense in the year granted' is wrong because a concession is not a cash outflow for maintenance or taxes; it is a revenue reduction. 'A capital item that is excluded from the income analysis' is wrong because concessions directly affect operating income and are not a capital improvement. Exam tip: For income analysis, always adjust contract rent to effective rent by spreading any concession value over the lease term.
Why This Is the Correct Answer
Why this is correct: Concessions like free rent are not an addition to income or a one-time expense. They represent a discount on the contract rent, reducing the actual cash flow the property generates. The governing principle is that effective gross income must reflect the true economic rent. For example, three months free on a three-year lease means the annual effective rent is lower than the stated contract rent. This reduction must be recognized over the entire lease term for an accurate income analysis. Why the other choices are wrong: 'An addition to potential gross income' is wrong because concessions reduce, not increase, the income actually received. 'An operating expense in the year granted' is wrong because a concession is not a cash outflow for maintenance or taxes; it is a revenue reduction. 'A capital item that is excluded from the income analysis' is wrong because concessions directly affect operating income and are not a capital improvement. Exam tip: For income analysis, always adjust contract rent to effective rent by spreading any concession value over the lease term.
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Potential gross income for an office building includes:
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An appraiser develops a 5-year DCF model for an industrial warehouse. The projected NOI is level at $180,000 per year. The reversion is estimated at $2,700,000. The investor’s overall yield rate is 8.0%. What is the indicated value of the property?