Is Excess Rent Intangible?

Headnote

Abstract

Excess rent is a term commonly understood by real estate appraisers to refer to contract rent that exceeds market rent at the date of an appraisal. This portion of the income stream generated by leased property is often mischaracterized, however, by those who fail to identify it as an intangible asset. Through logical application of long-accepted definitions of relevant terms, this article shows that the present value of excess rent is intangible, and it should be identified when included in the property rights being valued by appraisers.

Introduction

Real property appraisers are often asked to value properties encumbered by leases. The very nature of income-producing real estate is that cash flow is created through agreements with a tenant or tenants to make periodic payments in exchange for the right to occupy space. The value of a property subject to these agreements is largely a function of the level of revenue required by the contracts, and it is intuitive that, all else being equal, the higher the periodic payments, the higher the resulting value. Such an agreement is called a lease1 and the periodic payment is called rent.2 Because the fundamentals of leases and patterns of rental payments are well covered in the Appraisal Institute's body of knowledge and course materials,3 this article will not cover those topics in any depth. Rather, this article analyzes the nature of the rent produced pursuant to a lease, specifically to answer the question, "Is excess rent intangible?"

What Is Excess Rent?

While it is likely that no amount of revenue is viewed as "excess" from the perspective of property investors, most appraisers understand that excess rent is a term used to describe rent that is higher than the market rent for a property. The term is commonly used by professional real estate appraisers but is rarely used outside of the profession. The Dictionary of Real Estate Appraisal, sixth edition, defines excess rent as "the amount by which contract rent exceeds market rent at the time of the appraisal."4 This concept can be shown in equation form as

Excess Rent = Contract Rent - Market Rent

Excess rent is also addressed in The Appraisal of Real Estate, fourteenth edition, which explains,

A lease never increases the market value...