A New York appraiser is valuing a rent-controlled apartment building in Manhattan where tenants pay significantly below-market rents and have succession rights. Which valuation consideration is most important?
Correct Answer
B) Apply a very high capitalization rate to reflect the regulatory risk
Rent-controlled properties in New York require a very high capitalization rate in the income approach because of the significant regulatory restrictions, limited income potential, tenant succession rights, and the virtual impossibility of achieving market rents. The high cap rate reflects the increased investment risk and reduced income stream.
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