Which best distinguishes market rent from contract rent?
Correct Answer
B) The rent the property would command under specified competitive market terms as of the relevant effective date.
Market rent is an opinion for competitive leasing at the relevant effective date and specified terms. The date need not be today in a retrospective appraisal. Contract rent is the actual lease amount; neither a building-wide average nor rent net of all expenses defines market rent.
Why This Is the Correct Answer
Option B is correct because market rent is the rent the property would command under specified competitive market terms as of the relevant effective date. It is an opinion tied to the appraisal date, which need not be today in a retrospective appraisal. This distinguishes it from contract rent, which is the actual amount specified in a lease.
Why the Other Options Are Wrong
Option A: The amount stated in an existing lease, as negotiated when it was signed.
Option A is wrong because the amount stated in an existing lease, as negotiated when it was signed, is the definition of contract rent. Market rent reflects what the property would command if offered on the open market as of the effective date.
Option C: A building-wide arithmetic mean of the rents under existing leases, including outdated leases signed years ago.
Option C is wrong because a building-wide average of existing lease rents, including outdated leases signed years ago, mixes old contract rents and does not reflect current competitive terms. Market rent is an opinion of what the space would command as of the effective date.
Option D: The income left after deducting the property’s operating expenses from rent.
Option D is wrong because income left after deducting operating expenses from rent describes net operating income, not market rent. Market rent is a rent level, measured before operating expenses.
Contract is signed, market is offered
Contract rent is what the signed lease says; market rent is what the space would bring if offered for lease on the effective date.
How to use: Use this to sort rent definitions quickly on the exam.
Exam Tip
If a choice describes the existing lease amount, it describes contract rent; market rent ties to competitive terms on the effective date.
Common Mistakes to Avoid
- -Treating the average of existing leases as market rent
- -Confusing market rent with net operating income
- -Assuming market rent must be measured as of today even in a retrospective appraisal
Concept Deep Dive
Analysis
This question tests the definitions of market rent and contract rent. Market rent is what the property would command in a competitive market under specified terms as of the relevant effective date. Contract rent is the actual amount in an existing lease, which may differ from market rent.
Background Knowledge
The difference between contract and market rent drives the valuation of leased fee and leasehold interests. Market rent is estimated from comparable current leases adjusted for differences in terms and property features. Contract rent is a fact taken from the lease document.
Real-World Application
An appraiser values a fourplex where several tenants signed multiyear leases years ago at rents below current levels. She surveys recent comparable leases to estimate market rent as of the effective date and compares it with each tenant's contract rent. The gaps help her value the leased fee interest and identify upside at lease expiration.
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?
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