Assume all other obligations are equal and collectible contract rent exceeds market during an enforceable remaining term. What rent component can benefit the landlord?
Correct Answer
B) A leased-fee rent premium over that supported remaining period.
Enforceable collectible above-market rent can create a lessor rent-premium component for its remaining duration, all else equal. That is a leased-fee benefit, not a landlord leasehold. Total value still depends on costs, tenant credit, term and other rights.
Why This Is the Correct Answer
Option B is correct because enforceable, collectible above-market rent gives the lessor a rent premium over the remaining lease term, all else equal. That premium belongs to the leased fee interest, and its size depends on the gap between contract and market rent and on how long the lease has left to run. Total value still depends on costs, tenant credit, term and other rights.
Why the Other Options Are Wrong
Option A: A tenant rent-saving benefit from paying above market.
Option A is wrong because a tenant paying above market rent does not save money; it pays more than the market would require. Any benefit from the excess rent flows to the landlord, not to the tenant.
Option C: An automatic fall in landlord receipts caused by higher rent.
Option C is wrong because higher collectible contract rent does not cause an automatic fall in landlord receipts. With other obligations equal and the rent collectible, the landlord receives more income during the remaining term, not less.
Option D: No effect, because enforceable lease terms are ignored.
Option D is wrong because enforceable lease terms are not ignored when valuing a leased fee interest. Appraisers account for the difference between contract and market rent over the remaining term, so the lease does have an effect.
Who Pockets the Extra Rent
Ask who keeps the extra dollars: above-market rent puts the extra in the landlord's pocket, so the premium sits with the leased fee. Below-market rent leaves the savings in the tenant's pocket as leasehold value.
How to use: Use this whenever a question compares contract rent with market rent and asks which interest benefits.
Exam Tip
Identify whether contract rent is above or below market, then ask which party gains from the gap and for how long. The remaining term limits how long the premium or discount lasts.
Common Mistakes to Avoid
- -Thinking above-market rent creates a benefit for the tenant
- -Ignoring the remaining lease term when measuring the rent premium
- -Treating the premium as permanent instead of limited to the enforceable term
Concept Deep Dive
Analysis
This question tests how a lease with contract rent above market rent affects the lessor's position. When the excess rent is enforceable and collectible for the remaining term, the landlord receives more than the market would pay, and that extra income stream is a benefit attached to the leased fee interest. Reason from who receives the excess rent and for how long.
Background Knowledge
The leased fee interest is the lessor's position, and the leasehold interest is the tenant's position. The difference between fee simple value and leased fee value depends on the difference between contract and market rent and on the length of the remaining lease term. An above-market lease tends to favor the leased fee, while a below-market lease tends to create positive leasehold value for the tenant.
Real-World Application
An appraiser values a retail building leased to a creditworthy tenant at rent above current market levels, with six years left and no early termination rights. The appraiser models the contract rent for the remaining term and recognizes the above-market portion as a benefit to the leased fee, while weighing the risk that the tenant may struggle to keep paying above market.
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?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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?
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