A leased-fee DCF has an enforceable fixed lease, no renewal options, and a supported market reletting forecast after expiration. What rent treatment fits that model?
Correct Answer
B) Contract rent during the remaining term, then the supported post-expiration forecast.
In a simplified model without renewal options or other contrary rights, forecast enforceable contract rent for its remaining term and supported market terms thereafter, with vacancy and costs as relevant. A leased-fee valuation need not always use one mandated formula, and rent does not reset automatically if options apply.
Why This Is the Correct Answer
Option B is correct because a leased-fee DCF forecasts the enforceable contract rent for the remaining lease term and then the supported market reletting forecast after expiration. This reflects the rights actually held by the lessor. Vacancy, leasing costs and other expenses are included as relevant to the forecast.
Why the Other Options Are Wrong
Option A: Current market rent from the first forecast year forward, while ignoring the binding lease.
Option A is wrong because using current market rent from the first forecast year while ignoring the binding lease values a different interest. The leased fee is bound by the contract rent during the remaining term, so that lease cannot be ignored.
Option C: Current contract rent for the full forecast, past expiration.
Option C is wrong because projecting current contract rent for the full forecast, past expiration, extends the lease beyond its term. With no renewal options, the contract rent ends at expiration and the supported market forecast applies afterward.
Option D: Tenant business revenue substituted for landlord rent.
Option D is wrong because substituting the tenant's business revenue for landlord rent confuses the tenant's operating income with the real property income the lessor receives. A leased-fee DCF forecasts rent to the landlord, not the tenant's sales.
Contract Now, Market Later
While the lease runs, the contract sets the rent; once it ends with no options, the market sets the rent.
How to use: Use this phrase when building or checking the rent line in a leased-fee cash flow forecast.
Exam Tip
Check the stem for renewal options or other rights; when none apply, the answer pairs contract rent for the remaining term with market terms afterward.
Common Mistakes to Avoid
- -Ignoring the binding lease and using market rent from year one in a leased-fee analysis
- -Extending contract rent past expiration when no renewal option exists
- -Using the tenant's business revenue in place of rent to the landlord
Concept Deep Dive
Analysis
This question tests how to forecast rent in a leased-fee discounted cash flow when a binding lease exists and a market reletting forecast is supported. The leased fee interest is bound by the contract rent while the lease runs, and after expiration the forecast shifts to supported market terms. With no renewal options, nothing extends the contract rent past expiration.
Background Knowledge
The leased fee interest is valued subject to existing leases, so contract rent and terms govern during the remaining lease term. After expiration, the analysis typically shifts to supported market rent, with allowances for downtime, leasing costs and risk. Adjustments for above- or below-market leases can be estimated by discounting the difference between market and contract rent over the remaining term.
Real-World Application
An appraiser values an office building with a single tenant whose fixed-rent lease ends in four years with no renewal option. The DCF shows the contract rent through year four, then a period of downtime and leasing costs, followed by supported market rent for the rest of the holding period.
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
The subject property is a 120-unit apartment complex that earns parking, laundry and storage income in addition to rent. Sales of similar complexes show similar income mixes. Which measure should an appraiser developing a gross multiplier from these sales use?
Next Question
The subject property is an office building whose income is reported after management but with no deduction for replacement reserves. A comparable office building sold for $2,000,000 cash. Its reported NOI of $148,000 is after a $6,000 management fee and a $12,000 replacement reserve. What overall rate from this sale matches the subject's income?