Market vacancy for the area is 7%, but the subject has run 2% for a decade under long-term leases expiring in eight years. The vacancy allowance should reflect:
Correct Answer
D) The subject's supportable performance, with the departure explained
Why this is correct: The governing concept is that stabilized vacancy is a forward-looking estimate of typical vacancy for the subject property, not a mechanical import of either market averages or historical figures. When long-term leases securely in place support a below-market vacancy rate for a reasonable forecast period, that supportable performance should be used, with a clear explanation of the departure from the market norm. Why the other choices are wrong: "The average of the two figures by rule" is incorrect because there is no rule requiring averaging; the forecast must be reasoned. "Exactly 7%, the published area-wide figure, without permitting any exception" is incorrect because the subject's specific lease structure can justify a different estimate. "Zero, since the building is nearly full" is incorrect because vacancy allowance accounts for future turnover, not just current occupancy. Exam tip: Always justify a vacancy departure with specific subject evidence, such as lease terms, and document it in the report.
Why This Is the Correct Answer
Why this is correct: The governing concept is that stabilized vacancy is a forward-looking estimate of typical vacancy for the subject property, not a mechanical import of either market averages or historical figures. When long-term leases securely in place support a below-market vacancy rate for a reasonable forecast period, that supportable performance should be used, with a clear explanation of the departure from the market norm. Why the other choices are wrong: "The average of the two figures by rule" is incorrect because there is no rule requiring averaging; the forecast must be reasoned. "Exactly 7%, the published area-wide figure, without permitting any exception" is incorrect because the subject's specific lease structure can justify a different estimate. "Zero, since the building is nearly full" is incorrect because vacancy allowance accounts for future turnover, not just current occupancy. Exam tip: Always justify a vacancy departure with specific subject evidence, such as lease terms, and document it in the report.
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Previous Question
In a discounted cash flow analysis for a ground lease with 40 years remaining, the appraiser projects level annual ground rent of $120,000 and estimates a reversion (fee simple value at lease expiration) of $3,000,000. The appraiser selects a 5.0% yield rate for the leasehold interest. Which statement accurately describes how the reversion is treated in this analysis?
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Vacancy loss differs from collection loss in that collection loss reflects: