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
The subject’s enforceable leases, collection risk and forecast horizon may support a different expected loss from a broad area average. Explain the evidence and appraised interest. Historical occupancy alone does not guarantee future performance; neither automatic averaging nor a mandatory area rate is appropriate.
Why This Is the Correct Answer
Option D is correct because the vacancy allowance should reflect the subject's supportable expected performance, considering its enforceable leases, collection risk and forecast horizon, with the reasoning explained. Recent history of the subject and comparable properties is the starting point for the estimate. Historical occupancy alone does not guarantee future results, so the support must be documented.
Why the Other Options Are Wrong
Option A: The average of the two figures by rule
Option A, averaging the two figures by rule, is wrong because no rule requires a mechanical average. The allowance should rest on evidence about the subject's expected performance, not an arithmetic compromise.
Option B: Exactly 7%, the published area-wide figure, without permitting any exception
Option B, using exactly 7%, the published area-wide figure, with no exception, ignores the subject's long-term leases and strong record. A market figure is important evidence but does not override supportable subject-specific conditions.
Option C: Zero, since the building is nearly full
Option C, a zero allowance because the building is nearly full, is wrong because some vacancy and collection risk remains, especially with leases expiring within the forecast horizon. Near-full occupancy today does not eliminate future loss.
Support it, then explain it
Any vacancy figure must be supported by evidence, and a departure from market norms must be explained.
How to use: Use this when subject data and market data point to different vacancy rates.
Exam Tip
Be wary of answer choices that impose a mechanical rule or allow no exceptions; appraisal judgment based on supportable evidence is usually the better answer.
Common Mistakes to Avoid
- -Applying a zero vacancy allowance to a fully leased building
- -Mechanically averaging subject and market rates
- -Using the market rate without considering subject lease terms
Concept Deep Dive
Analysis
This question tests judgment in estimating vacancy and collection loss when the subject's history differs from the market. Long-term leases, strong occupancy and the forecast horizon may support a lower allowance than the area average. The appraiser should base the allowance on supportable evidence and explain any departure from market figures.
Background Knowledge
Vacancy and collection loss is estimated from the history of the subject and comparable properties along with market conditions and lease terms. Stabilized occupancy may differ from both current market vacancy and the subject's actual vacancy on the valuation date.
Real-World Application
An appraiser valuing a warehouse leased to a creditworthy tenant for eight more years finds market vacancy well above the subject's history. The appraiser applies a lower but nonzero allowance and explains the lease terms and tenant quality that support it.
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