Apartments: Gain-to-Lease / Loss-to-Lease

[barcelona]

Can anyone explain the concept of "Gain-to-Lease" in the realm of apartments to me?

I think I get the basic concept: if the existing Contract Rents are GREATER than Market Rents you have a "Gain-to-Lease". That is, you are "gaining" from the "existing" contract rents vs. the now lower market rents. It that the right way to think about it?

I just find it somewhat counterintuitive....because you could turn it around and say you have a "Gain-to-Lease" when Market Rents are GREATER THAN Contract Rents, where you are "gaining" on the existing contract rents??

I am probably complicating this too much...but any clarification or comments from veterans would be much appreciated.

Thanks.

 

[nstanbru]

I'm not familiar with the term you used. The terms I'm familiar with are Lessee's advantage and Lessor's advantage. Although, these terms are more often associated with commercial properties than res. income properties.

 

[Ken B]

I think the terms "excess rent" and "deficit rent" are more commonly used in the appraisal profession. Otherwise, I think your understanding is correct.

Now to blow your mind. There is a line of thought that income from excess rent is not attributable to the property but is, instead, attributable to the contract. Thus, in any estimate of market value for the real property, excess rent should not be considered.

 

[Lost Cause]

Mind Blowing, Indeed!

Now to blow your mind. There is a line of thought that income from excess rent is not attributable to the property but is, instead, attributable to the contract. Thus, in any estimate of market value for the property, excess rent should not be considered.

Would it not follow then, that the shortfall caused by deficit rent is also attributable not to the real estate, but to the contract? Is the value of the fee simple interest the only value attributable to real estate then?

 

[Ken B]

Curiously, I don't think I have ever observed a deed where the interest transferred was leased fee. I have only observed deeds where the interest transferred is fee simple, although that interest may be encumbered by a lease, among other things.

So, is the lease a component of the real property or is it personalty?

 

[PropertyEconomics]

Now to blow your mind. There is a line of thought that income from excess rent is not attributable to the property but is, instead, attributable to the contract. Thus, in any estimate of market value for the real property, excess rent should not be considered.

Ken .. this is an interesting thought, but, doesnt the contract exist as a result of the real estate? The contract it self provides nothing really with respect to being able to "produce income".
Wouldnt this be a classic example of surplus productivity with the excess income being attributable to the land? In the event of sale would not the contract be most probably part of the transaction, thus the new purchaser would be purchasing a contract in which contract rent exceeded market rent?
I would think one would capitalize market rent and then add the discounted value of the excess rent attributable to the remaining terms of the contract(s) as of the effective date of appraisal.

If you were to consider the contracts personalty ... wouldnt the property essentially be vacant and having less value because the value of the contracts were what provided for the income to be produced???? (I know this last sentence contradicts my second sentence, but I am taking this two different directions since you essentially have)

A very interesting post Ken.

 

[Ken B]

I think surplus productivity assumes market returns.

Two identical office condo properties are leased on the same day with identical lease terms with the exception of the rent received. One is leased at market; the other is leased above market. The owner of the property leased above market has superior negotiating skills. Is the excess rent attributable to the real property or the skills of the property owner?

 

[PropertyEconomics]

I think surplus productivity assumes market returns.

Two identical office condo properties are leased on the same day with identical lease terms with the exception of the rent received. One is leased at market; the other is leased above market. The owner of the property leased above market has superior negotiating skills. Is the excess rent attributable to the real property or the skills of the property owner?

Isnt that what 'leased fee' is really all about? Under your theory, every building that was similar and commanded the same rent would have the same value ... and we know that not to be true ... or atleast it isnt in my market ... owners are entitled to value based on their abilities .... in my opinion ...... but its an interesting theory.

 

[andy ruffner]

I think the terms "excess rent" and "deficit rent" are more commonly used in the appraisal profession. Otherwise, I think your understanding is correct.

Now to blow your mind. There is a line of thought that income from excess rent is not attributable to the property but is, instead, attributable to the contract. Thus, in any estimate of market value for the real property, excess rent should not be considered.

That was mind blowing! haha or mind bottling. I've never heard that.