A commercial property has passing rent of $180,000 per annum with annual reviews, but market rent is assessed at $220,000 per annum. The lease has 8 years remaining with a quality tenant. How should this rental situation affect the capitalisation approach valuation?
Correct Answer
B) Use a term and reversion approach with different rates for each period
The term and reversion method is appropriate when passing rent differs significantly from market rent. This involves capitalising the contracted rent for the lease term, then the market rent for the reversion period, using different capitalisation rates reflecting the different risk profiles.
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A commercial property generates annual rental income of $120,000 with operating expenses of $25,000. Using a capitalisation rate of 7.5%, what is the property's value using the capitalisation approach?
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