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:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
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:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
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 appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% 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?