Why does a long below-market lease to a strong tenant cut the owner's value while a market-rent lease does not?
Correct Answer
D) The owner cannot reach market rent until the lease expires
Why this is correct: The leased fee interest is the right to the contracted rent. A long-term below-market lease locks in a cash flow shortfall for its duration. The present value of that lost income (market rent minus contract rent) is discounted, reducing the property's current value. Why the other choices are wrong: 'Strong tenants demand costly building services' is not inherent to a below-market lease. 'Long leases nearly always carry below-market renewal options' is an overgeneralization. 'Below-market leases raise the vacancy allowance' confuses contractual rent with vacancy loss. Exam tip: Value is based on actual lease terms; a below-market lease creates a 'leasehold' benefit for the tenant at the owner's expense.
Why This Is the Correct Answer
Why this is correct: The leased fee interest is the right to the contracted rent. A long-term below-market lease locks in a cash flow shortfall for its duration. The present value of that lost income (market rent minus contract rent) is discounted, reducing the property's current value. Why the other choices are wrong: 'Strong tenants demand costly building services' is not inherent to a below-market lease. 'Long leases nearly always carry below-market renewal options' is an overgeneralization. 'Below-market leases raise the vacancy allowance' confuses contractual rent with vacancy loss. Exam tip: Value is based on actual lease terms; a below-market lease creates a 'leasehold' benefit for the tenant at the owner's expense.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
Potential gross income for an eight-unit building at $1,200 per unit monthly, before any deductions, is:
Next Question
An appraiser is analyzing a property with a single net lease. The lease stipulates the tenant pays $60,000 annual base rent plus all operating expenses, which are estimated at $20,000 per year. Market vacancy for similar properties is 5%. What is the property's estimated Effective Gross Income?