When appraising a leased fee interest, the appraiser should consider:
Correct Answer
D) The rental income and reversionary interest
Analyze the landlord’s actual contract cashflows, lease terms, expenses, risks and supported reversion or residual rights. Current rent alone or hypothetical fee-simple value alone is insufficient. Ownership and reversion of improvements depend on the lease and law; do not automatically exclude tenant investment effects.
Why This Is the Correct Answer
Option D is correct because a leased fee interest is the lessor's interest, including the right to receive the rent stipulated in the lease and to receive the property at the end of the lease term. The appraiser analyzes the contract rental income, lease terms, expenses and risks along with the reversionary interest. Together these make up the value of the landlord's position.
Why the Other Options Are Wrong
Option A: The current rent, capitalized as if it were market rent
Option A is wrong because it capitalizes the current rent as if it were market rent. A leased fee is valued on the actual contract rent and terms, which may be above or below market, so treating contract rent as market rent misstates the interest.
Option B: The tenant's investment in improvements
Option B is wrong because it focuses on the tenant's investment in improvements. That investment relates to the leasehold side, and while lease terms may affect who owns improvements at reversion, it is not the core of leased fee valuation.
Option C: The property’s fee simple value as if unencumbered
Option C is wrong because it values the property as if unencumbered in fee simple. A leased fee is encumbered by the lease, so its value reflects the lease terms rather than a hypothetical unencumbered fee.
Rent now, property later
The landlord gets rent now and the property back later, so the leased fee is rent plus reversion.
How to use: Use this when deciding what to analyze in a leased fee valuation.
Exam Tip
Separate the leased fee (landlord's position) from the fee simple and from the leasehold before choosing.
Common Mistakes to Avoid
- -Capitalizing contract rent as if it were market rent
- -Valuing a leased fee as if unencumbered
- -Ignoring the reversion at the end of the lease
Concept Deep Dive
Analysis
This question tests what makes up the value of a leased fee interest. The landlord's interest consists of the right to receive the contract rent during the lease and the right to get the property back at the end of the lease. Valuing it requires analyzing both the income stream and the reversion.
Background Knowledge
When a property is leased, the ownership is divided into the leased fee held by the landlord and the leasehold held by the tenant. The leased fee value reflects the present value of contract rent over the lease term plus the reversion at lease end. If contract rent differs from market rent, the leased fee and fee simple values may differ.
Real-World Application
An appraiser values a retail building leased to a national tenant at below-market rent for ten more years. The appraiser discounts the contract rent over the remaining term and adds the present value of the reversion to estimate the leased fee value.
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