An appraiser uses a residual model in which a tenant's interest equals the whole unencumbered value minus the landlord's interest, with no other effects. The whole unencumbered value and the landlord's interest are $910,000 and $985,000, respectively. What does this model indicate for the tenant's interest?
Correct Answer
C) −$75,000
Under this model, $910,000 − $985,000 = −$75,000. The negative sign is essential. This is a conditional indication, not a rule that separately appraised market values of partial interests always sum to unencumbered fee-simple value, or that contract rent alone fixes an interest’s value.
Why This Is the Correct Answer
Option C is correct because the model defines the tenant amount as whole unencumbered value minus the landlord's interest, so $910,000 − $985,000 = −$75,000. The landlord's interest is larger than the whole value in this model, so the tenant indication is negative. This is a conditional result under the stated model, not a general rule that partial interests add up to fee simple value.
Why the Other Options Are Wrong
Option A: $910,000
Option A, $910,000, simply repeats the whole unencumbered value and leaves out the subtraction of the landlord's $985,000 interest. The model requires $910,000 − $985,000 = −$75,000.
Option B: $0
Option B, $0, forces the tenant's interest to zero because a negative value seems impossible. The stated model gives $910,000 − $985,000 = −$75,000, and the sign is kept.
Option D: $1,895,000
Option D, $1,895,000, adds the two figures ($910,000 + $985,000 = $1,895,000), as if the whole value and the landlord's interest combined into the tenant's share. The model subtracts: $910,000 − $985,000 = −$75,000.
Respectively means in order
Match 'respectively' figures to the items in the order listed, then subtract in the model's order and keep the sign.
How to use: Use this whenever a stem lists amounts 'respectively' and asks for a difference.
Exam Tip
Map each figure to its label before calculating; a negative result can be the correct answer when the model and numbers produce it.
Common Mistakes to Avoid
- -Reporting the whole unencumbered value without subtracting the landlord's interest
- -Adding the interests instead of subtracting the landlord's share
- -Dropping the negative sign because a negative value seems impossible
Concept Deep Dive
Analysis
This question tests careful application of a stated model and attention to the order of the figures given. The model says the tenant interest equals whole unencumbered value minus the landlord's interest, and the amounts are given as $910,000 and $985,000 respectively. Plugging them in correctly yields a negative result, and keeping the sign is the key step.
Background Knowledge
Leased fee and leasehold are ownership components of a property, and some analyses model one interest as a residual of another. In actual practice, separately appraised partial interests do not necessarily sum to the unencumbered fee simple value. When a question states a residual model, the candidate applies it exactly as stated, including any negative result.
Real-World Application
An appraiser analyzing a property leased at well above market rent finds the landlord's position worth more than an unencumbered fee simple estimate under a residual model. The appraiser reports the resulting negative tenant indication as a conditional model result and explains the assumptions rather than forcing it to zero.
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