In a simple undiscounted effective-rent comparison, how are free-rent concessions reflected?
Correct Answer
D) Spread the reduction in receipts over the stated lease term.
For this simple comparison, total the rent receipts after free-rent concessions and divide by the term. A discounted equivalent-rent analysis can also consider payment timing when appropriate. Effective rent is not automatically face rent, and no rule requires using an undiscounted average for every lease.
Why This Is the Correct Answer
Option D is correct because free rent reduces the total receipts under the lease, and an undiscounted effective rent spreads that reduction over the stated term. Total the rent after the concession and divide by the term to compare leases on an equal footing.
Why the Other Options Are Wrong
Option A: Add the concession as additional rental income.
Option A adds the concession as extra rental income. Free rent is a reduction in what the tenant pays, so adding it would overstate rent instead of lowering it.
Option B: Deduct it only from the final sale proceeds.
Option B deducts the concession only from final sale proceeds. A rent concession affects lease income during the term, and an effective-rent comparison reflects it there.
Option C: Ignore it because it is labeled a marketing cost by the landlord.
Option C ignores the concession because the landlord labels it a marketing cost. A label does not change the economics; concessions effectively lower the quoted market rent.
Free rent thins the average
Free months are zero-rent months; averaging over the full term pulls the effective rent below face rent.
How to use: Use this picture to remember that concessions lower effective rent.
Exam Tip
Face rent and effective rent differ when concessions exist; compare leases on effective rent.
Common Mistakes to Avoid
- -Using face rent when concessions were given
- -Treating concessions as added income
- -Ignoring concessions because of how they are labeled
Concept Deep Dive
Analysis
This question tests how free-rent concessions affect effective rent. Concessions lower the quoted rent, so in a simple undiscounted comparison the total rent actually received over the term is divided by the term. That spreads the free-rent reduction across the whole lease.
Background Knowledge
Rent concessions include free or reduced rent for a period, extra tenant improvements and other inducements, and they effectively lower the quoted rental rate. A discounted equivalent-rent analysis can also account for the timing of payments when appropriate.
Real-World Application
A comparable duplex lease quotes $1,800 a month for 12 months with the first month free. The appraiser totals rent over the 12 months and divides by the term to compare it with other leases.
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?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
Annual PGI for the subject property is $105,000, and combined vacancy and collection loss is $5,250. There is no other income. Annual operating expenses, excluding debt service, total $29,750. Using an 8% overall rate, what is the indicated value?
Next Question
An investment provides $11,000 at the end of year 1 and $121,000 including all terminal proceeds at the end of year 2. There are no other cash flows. At a 10% annual discount rate, what present value results?