In an appraisal of a leased fee interest, the income analyzed is:
Correct Answer
B) Contract rent for the lease term, then market rent
Why this is correct: The leased fee interest includes the right to receive contract rent until lease expiration, then market rent. The income stream in a DCF or direct capitalization must reflect this transition. Why the other choices are wrong: "Market rent applied across the entire projection period" values the fee simple, not the leased fee. "Contract rent extended indefinitely" ignores the lease term and reversion to market. "The tenant's business income from the space" is entrepreneurial profit, not property income. Exam tip: Leased fee = contract rent during lease term + market rent thereafter.
Why This Is the Correct Answer
Why this is correct: The leased fee interest includes the right to receive contract rent until lease expiration, then market rent. The income stream in a DCF or direct capitalization must reflect this transition. Why the other choices are wrong: "Market rent applied across the entire projection period" values the fee simple, not the leased fee. "Contract rent extended indefinitely" ignores the lease term and reversion to market. "The tenant's business income from the space" is entrepreneurial profit, not property income. Exam tip: Leased fee = contract rent during lease term + market rent thereafter.
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Contract rent above market rent creates, from the landlord's perspective:
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A certified general appraiser is developing a market-derived overall capitalization rate for an industrial warehouse using direct capitalization. She selects four comparable sales but excludes one because its lease included a tenant improvement allowance amortized over the lease term, causing the reported net operating income to understate the property’s sustainable operating income. Which USPAP standard most directly governs this exclusion decision?