The value of a leased property is allocated between the landlord's and the tenant's interests, and the two allocations must add to the total. The total allocated value is $710,000 and the landlord's allocation is $775,000. What tenant allocation, positive or negative, balances the total?
Correct Answer
A) −$65,000
Tenant allocation =710000−775000=−65000 dollars. Common errors: setting the tenant allocation to zero because a negative interest seems impossible gives $0; adding the allocations instead of subtracting gives $1,485,000; reporting the landlord allocation gives $775,000.
Why This Is the Correct Answer
Option A is correct because the tenant allocation equals $710,000 - $775,000 = -$65,000. The negative sign shows the landlord allocation exceeds the stated total. This is arithmetic within the stated allocation, not a claim that separately valued interests always add to unencumbered market value.
Why the Other Options Are Wrong
Option B: $0
Option B is wrong because $0 sets the tenant allocation to zero, as if an interest could not be negative. The allocations must add to the total, so the tenant allocation is $710,000 - $775,000 = -$65,000.
Option C: $775,000
Option C is wrong because $775,000 is simply the landlord allocation reported as the answer. The tenant allocation is the total minus the landlord share: $710,000 - $775,000 = -$65,000.
Option D: $1,485,000
Option D is wrong because $1,485,000 comes from adding the allocations ($710,000 + $775,000) instead of subtracting. The correct calculation is $710,000 - $775,000 = -$65,000.
Total minus landlord equals tenant
In the additive model, subtract the landlord piece from the total, and keep the sign that results.
How to use: Use this subtraction and sign check for any two-part allocation question.
Exam Tip
When one component exceeds the total, expect a negative remainder and look for the option with the minus sign.
Common Mistakes to Avoid
- -Forcing a negative tenant allocation to zero
- -Adding the landlord allocation to the total
- -Reporting the landlord allocation as the tenant's share
Concept Deep Dive
Analysis
This question tests arithmetic within an additive model of ownership components. If the landlord and tenant allocations must add to the total, the tenant allocation is the total minus the landlord allocation. Because the landlord allocation exceeds the total, the tenant allocation is negative.
Background Knowledge
Property can be analyzed by ownership components, such as the leased fee held by the landlord and the leasehold held by the tenant. In an additive model, the components are set to sum to a stated total. When a lease is above market, the leasehold can carry a negative value in such a model.
Real-World Application
An appraiser analyzing a property leased at above-market rent finds the leased fee value exceeds the stated total in the client's allocation model. The resulting negative leasehold allocation reflects the tenant's burden of paying more than market rent.
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