A California appraiser is using the Discounted Cash Flow (DCF) method for a 20-unit apartment building in Berkeley. Berkeley has its own rent control ordinance separate from AB 1482, with an annual allowable increase tied to 65% of the Bay Area CPI. When projecting future income in the DCF analysis, what special consideration must the appraiser address?
Correct Answer
A) Project rental income growth at the Berkeley rent control allowable rate for existing tenants and at market rates upon vacancy decontrol (when a unit turns over), modeling tenant turnover probability
Under Berkeley's rent control ordinance, existing tenants' rents can only increase by the allowable annual adjustment (65% of CPI). However, upon vacancy (when a tenant moves out), the unit can be re-rented at market rate (vacancy decontrol). A proper DCF analysis must model both streams: limited increases for existing tenants and market-rate resets upon turnover. This requires estimating tenant turnover rates to project when units will be re-rented at higher market rates.
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Related Topics & Key Terms
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