Renewal options at below-market rent affect a leased fee valuation because:
Correct Answer
D) The tenant will likely exercise, extending the discount
Why this is correct: In valuation, renewal options are analyzed based on the probability of exercise. If the option rent is below the projected market rent at the option date, a rational tenant is very likely to exercise it. This extends the period of below-market income for the landlord, reducing the leased fee value. Why the other choices are wrong: Options do not always favor the owner; below-market options favor the tenant. Options have an effect on value even before exercise due to their probability. The landlord cannot freely reset the rent if a below-market option is exercised. Exam tip: Value the leased fee based on the most probable lease scenario, which includes exercised favorable options.
Why This Is the Correct Answer
Why this is correct: In valuation, renewal options are analyzed based on the probability of exercise. If the option rent is below the projected market rent at the option date, a rational tenant is very likely to exercise it. This extends the period of below-market income for the landlord, reducing the leased fee value. Why the other choices are wrong: Options do not always favor the owner; below-market options favor the tenant. Options have an effect on value even before exercise due to their probability. The landlord cannot freely reset the rent if a below-market option is exercised. Exam tip: Value the leased fee based on the most probable lease scenario, which includes exercised favorable options.
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An appraiser derives an overall rate of 7.5% from four sales ranging from 6.9% to 8.2%. The conclusion should:
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A certified general appraiser is estimating an overall capitalization rate for a newly constructed, triple-net leased industrial warehouse. The tenant has a BBB+ credit rating, the lease expires in 12 years, and market vacancy is 4%. The appraiser extracts a 6.5% cap rate from three recent sales of similar properties but adjusts it downward by 0.75 percentage points to reflect the subject's longer lease term and stronger tenant credit relative to the comparables. Which USPAP standard or advisory opinion most directly governs the defensibility of this adjustment?