When contract rent exceeds market rent, the leasehold interest?

When contract rent exceeds market rent, the leasehold interest typically has no positive value because the financial burden of paying above-market rent can diminish the desirability and usability of the lease. In this scenario, the lessee is paying more for the lease than what the property would fetch if it were rented at the prevailing market rates. As a result, the leasehold does not provide any economic benefit to the lessee, and thus, its value is considered negative or non-existent.

The market rent reflects the income that a property could reasonably expect to generate in the current rental market, so when contract rent exceeds this figure, it signals an unfavorable position for the lessee. Consequently, they may find the leasehold interest undesirable, leading to a depreciation in value associated with that lease. This creates a situation where the leasehold interest effectively has no positive value.

In contrast to this, subleasing and mortgaging are not feasible or beneficial options in a circumstance where the lease costs exceed the market rate. The need for appraisal may arise in various scenarios, but it doesn’t directly address the inherent value implications of excess contract rent versus market rent.