Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Correct Answer
B) Excess rent, contract over market
Why this is correct: The governing concept is that contract rent is the actual rent specified in the lease, while market rent is the prevailing rent for similar properties. When contract rent exceeds market rent, the difference is termed "excess rent." This excess is a contractual premium that exists only as long as the lease is in effect and the tenant remains solvent, and it is typically valued separately at a higher discount rate due to its higher risk. Why the other choices are wrong: "Deficit rent, borne by the tenant" is incorrect because a deficit would imply rent below market, not above. "Percentage rent from the overage clause" is incorrect because percentage rent refers to additional rent based on sales, not a fixed premium over market. "Effective rent net of concessions" is incorrect because effective rent accounts for concessions like free rent, not simply the difference between contract and market rent. Exam tip: In valuation, excess rent is capitalized separately at a higher rate, reflecting its dependency on the tenant's covenant and lease duration.
Why This Is the Correct Answer
Why this is correct: The governing concept is that contract rent is the actual rent specified in the lease, while market rent is the prevailing rent for similar properties. When contract rent exceeds market rent, the difference is termed "excess rent." This excess is a contractual premium that exists only as long as the lease is in effect and the tenant remains solvent, and it is typically valued separately at a higher discount rate due to its higher risk. Why the other choices are wrong: "Deficit rent, borne by the tenant" is incorrect because a deficit would imply rent below market, not above. "Percentage rent from the overage clause" is incorrect because percentage rent refers to additional rent based on sales, not a fixed premium over market. "Effective rent net of concessions" is incorrect because effective rent accounts for concessions like free rent, not simply the difference between contract and market rent. Exam tip: In valuation, excess rent is capitalized separately at a higher rate, reflecting its dependency on the tenant's covenant and lease duration.
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