PROP 1020 / CHAPTER 6 Flashcards
The _______interest is the most complete interest in real estate where the title is only encumbered by the powers of government.
ANSWER: FEE SIMPLE
TRUE OR FALSE? The Gordon growth model is used to determine the value of an investment based on a future series of income streams that grow at a constant rate.
ANSWER: TRUE
To capture the concept of complete ownership, the unencumbered fee simple interest is sometimes referred to as a complete _ _ _ _ _
ANSWER:
To capture the concept of complete ownership, the unencumbered fee simple interest is sometimes referred to as a complete BUNDLE OR RIGHTS
NOTE ONLY
An important initial task for an appraiser who is valuing the fee simple interest in a leased property is to determine whether the lease rents are representative of market rents and whether adjustments are required to the property rents or the overall capitalization rate to reflect market conditions.
The capitalized value of the fee simple interest in property is typically determined by capitalizing market rent for the property, with a market derived overall capitalization rate.
NOTE ONLY
An important initial task for an appraiser who is valuing the fee simple interest in a leased property is to determine whether the lease rents are representative of market rents and whether adjustments are required to the property rents or the overall capitalization rate to reflect market conditions.
The capitalized value of the fee simple interest in property is typically determined by capitalizing market rent for the property, with a market derived overall capitalization rate.
The leased fee estate is _ _ _ _ _ _
The leased fee estate is the ownership interest held by the lessor (landlord), which includes the right to receive the rent specified in the lease, plus the reversionary right when the lease expires.
The _ _ _ _ _ _ _ is the right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease.
The leasehold estate is the right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease.
EXAMPLE OF LEASEHOLD INTEREST
A simple example of a leasehold interest is a retail tenant who operates a drug store in a strip mall. The tenant has secured a lease for 5,000 sq. ft. with a 10-year term at a fixed rate of $20.00 psf, escalating to $22.00 psf in year 6 of the term. By year 3 of the lease, market rents for similar space have increased to $23.00 psf.
Given positive market conditions it is possible that rents will continue to rise. The tenant has a minimum $3.00 psf rent advantage for years 3 to possibly year 5 and beyond, amounting to a minimum rental advantage of $15,000 in rent per year for at least 3 years.
The difficulty is forecasting continued strength in the retail market for periods greater than the short-term. The other issue is that the tenant can only realize their potential leasehold interest by an assignment to another party who is prepared to pay a fee for the right to obtain a below market lease, or enter into a sublease at market rent. Landlords are well aware of this possibility and most will ensure that the lease has a provision to restrict the ability of a tenant to sub-lease or assign their interest for a profit.
EXAMPLE OF LEASEHOLD INTEREST
A simple example of a leasehold interest is a retail tenant who operates a drug store in a strip mall. The tenant has secured a lease for 5,000 sq. ft. with a 10-year term at a fixed rate of $20.00 psf, escalating to $22.00 psf in year 6 of the term. By year 3 of the lease, market rents for similar space have increased to $23.00 psf.
Given positive market conditions it is possible that rents will continue to rise. The tenant has a minimum $3.00 psf rent advantage for years 3 to possibly year 5 and beyond, amounting to a minimum rental advantage of $15,000 in rent per year for at least 3 years.
The difficulty is forecasting continued strength in the retail market for periods greater than the short-term. The other issue is that the tenant can only realize their potential leasehold interest by an assignment to another party who is prepared to pay a fee for the right to obtain a below market lease, or enter into a sublease at market rent. Landlords are well aware of this possibility and most will ensure that the lease has a provision to restrict the ability of a tenant to sub-lease or assign their interest for a profit.
When the tenant or lessee subleases to a third party, a further interest is created in the property. The person to whom the sublease is given is known as the _ _ _ _ _
When the tenant or lessee subleases to a third party, a further interest is created in the property. The person to whom the sublease is given is known as the sublessee and the sublessee’s interest is known as the sub or top leasehold estate.
The value of the subleasehold or sublessee’s interest is found by _ _ _ _ _ _ _ _ _
The value of the subleasehold or sublessee’s interest is found by calculating the present value of the difference between the market rent and the contract rent paid to the head lessee or sublessor for the unexpired term of the sublease. The sublessee’s interest is instantly “crystallized” or realized when the sublease is executed by the parties for an amount less than market rent.
What creates leasehold value?
ANSWER:
Change in market conditions
Capital investment by the lessee
Explain how changes in market conditions creates leasehold value?
ANSWER
Leasehold value may be created when the contract rent is less than the current market rent.
There are limitations to this theory, the most important being the right of the lessee to assign or sublease their lease to a third party at market or above contract rent to realize the rent differential.
The second limitation is the length of term remaining in the lease – it may be of insufficient length to create value.
The third condition is that the lessee has the ability to wind up their use of the existing premises. If the lessee still needs the premises for their activities, there is little point in assigning or subleasing their space since the lessee will be back competing for new space at market rent.
The reality is a leasehold interest rarely has value since tenants will need compelling reasons to assign or sublease their premises.
Typically, an assignment or sublease will be necessary as a result of the tenant’s business failure, need for less or more space, disagreements with the landlord, merger and acquisitions, or another business issue. In other words, it is business events that trigger the need to assign or sublease, rather than an opportunity to realize a profit related to below-market rents.
In contrast to market value, investment value represents value to _ _ _ _ _
ANSWER
In contrast to market value, investment value represents value to a specific investor, not necessarily value to a typical investor in the marketplace.
The term _ _ _ _ _ _ _ _ is used by real estate professionals to pinpoint the actual cash inflow resulting from a lease agreement.
ANSWER
The term net effective rent or NER is used by real estate professionals to pinpoint the actual cash inflow resulting from a lease agreement. NER is also referred to as Common Net Effective Rent. Landlord incentives such as free rent, tenant improvement allowances, and other tangible benefits have the effect of reducing the contract rent to an effective rent.
NOTE ONLY
Common Net Effective Rent is the true Rent related to a certain lease transaction, based on the present value using the common discount rate, of all Rent receivable by a Landlord over the initial fixed term, less the present value of all tenant inducements, free rent periods and commissions payable, with such remainder present value then amortized over the fixed initial lease term (REALpac/AIC 2001).
NOTE ONLY
Common Net Effective Rent is the true Rent related to a certain lease transaction, based on the present value using the common discount rate, of all Rent receivable by a Landlord over the initial fixed term, less the present value of all tenant inducements, free rent periods and commissions payable, with such remainder present value then amortized over the fixed initial lease term (REALpac/AIC 2001).
NOTE ONLY
NER or Common NER is commonly used by brokers, landlords, and tenants to compare the impact of alternative leasing incentives, terms, and other lease modifications over the term. NER is also very useful for tenants in comparing the economics of alternative space for lease and provides the landlords the ability to determine if they are competitive in the local market.
NOTE ONLY
NER or Common NER is commonly used by brokers, landlords, and tenants to compare the impact of alternative leasing incentives, terms, and other lease modifications over the term. NER is also very useful for tenants in comparing the economics of alternative space for lease and provides the landlords the ability to determine if they are competitive in the local market.