An appraiser is valuing a Los Angeles apartment building subject to the LA Rent Stabilization Ordinance (RSO). Current contract rents are below market due to long-term tenancies. Which approach to rent is MOST appropriate when applying the income approach to this property?
Correct Answer
A) Use contract rents as the income stream, since those are the rents the property will actually generate under RSO restrictions
For income-producing properties subject to rent control, standard California appraisal practice and USPAP guidance direct the appraiser to use actual contract rents as the basis for the income stream in the income approach. Because the LA Rent Stabilization Ordinance legally restricts rent increases and governs tenancy conditions, the contract rents represent the property's actual, legally permissible income. The appraiser then reflects the risk and constraints of rent control through an appropriate capitalization rate adjustment or other market-derived methodology — not by substituting market rents for rents the property cannot legally collect.
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Previous Question
A California investor is using the Gross Rent Multiplier (GRM) to estimate the value of a duplex in Long Beach. The duplex generates $4,200 per month in total rent. Three comparable sales in the Long Beach market show GRMs of 16.5, 17.0, and 17.5. Using the average GRM, what is the estimated value?
Next Question
A 6-unit apartment building in San Francisco is subject to rent control. Contract rents total $15,800/month. The appraiser determines a 3% vacancy rate, annual operating expenses of $72,000, and applies a cap rate of 4.5% to reflect rent control risk. What is the income approach value based on contract rents?