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
Contract rent exceeds market by $4 per square foot per year, which is excess rent on the stated basis. Its effect on leased-fee value depends on duration, enforceability, collection and risk; a higher separate discount rate is not automatically required in every case.
Why This Is the Correct Answer
Option B is correct because contract rent of $30 per square foot exceeds market rent of $26 by $4, and the amount by which contract rent exceeds market rent is excess rent. Its effect on leased-fee value depends on factors such as lease duration, enforceability, collection and risk.
Why the Other Options Are Wrong
Option A: Deficit rent, borne by the tenant
Option A calls the $4 deficit rent borne by the tenant. Deficit rent is the shortfall when contract rent is below market rent; here contract rent is above market, so the term does not fit.
Option C: Percentage rent from the overage clause
Option C calls the difference percentage rent from an overage clause. Percentage rent is additional rent based on a tenant's sales above a breakpoint, not the gap between contract and market rent.
Option D: Effective rent net of concessions
Option D calls it effective rent net of concessions. Effective rent adjusts contract rent for concessions such as free rent; it is not the difference between contract rent and market rent.
Excess Above, Deficit Below
If the lease rent is above market, the extra is excess rent. If it is below market, the shortfall is deficit rent.
How to use: Use this when a question compares contract rent with market rent and asks you to name the difference.
Exam Tip
Identify which figure is contract rent and which is market rent, then decide whether contract is above or below market.
Common Mistakes to Avoid
- -Confusing excess rent with deficit rent
- -Calling the contract-market gap percentage rent
- -Assuming excess rent always requires a separate, higher discount rate
Concept Deep Dive
Analysis
This question tests rent terminology for leased property. When contract rent exceeds market rent, the difference is excess rent. Recognizing which way the gap runs, and that the other options describe different concepts, leads to the answer.
Background Knowledge
Contract rent is the rent specified in a lease, while market rent is the rent a property would most probably command in the open market. When contract rent exceeds market rent, the excess may be riskier to the landlord because a tenant has an incentive to leave or default, which affects leased-fee value.
Real-World Application
An appraiser values an office building where a tenant signed a lease at the peak of the market and now pays well above current market rent. The appraiser identifies the excess rent and considers the remaining term and tenant credit when valuing the leased fee.
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