Property Valuation
An appraiser reviewing a commercial property's rent roll notices that several leases are at below-market contract rents. The appraiser may account for this by:
AIgnoring below-market leases and using market rents for the valuation
BAnalyzing both the contract rent (in-place leases) and market rent, and potentially using a leasehold/leased fee analysis✓ Correct
CAutomatically reducing the value by the present value of below-market rents
DUsing only contract rents because they are the actual rents being paid
Explanation
When contract rents differ significantly from market rents, appraisers may need to analyze both the leased fee value (based on contract rents with tenancy in place) and the fee simple value (at market rents). The difference creates a leasehold interest value split between the lessor and lessee.
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Key Terms to Know
Fee Simple
The highest and most complete form of property ownership — absolute ownership with the right to use, sell, or pass the property to heirs.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
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