A tenant in financial trouble is perceived as a risk in appraisals for lease interests. What is likely to happen to the interest rate used in value calculations?

When valuing lease interests, the perceived financial stability of a tenant plays a crucial role in determining the interest rate used in calculations. A tenant who is in financial trouble presents a higher risk to landlords and investors, as there is a greater chance of default on lease payments.

As a result of this increased risk, lenders and appraisers will adjust the interest rate to reflect this concern. A higher interest rate is typically applied to compensate for the potential instability and financial issues that may arise with a tenant in trouble. This increased rate serves as a risk premium, which protects the lender or investor against the possibility of reduced cash flow or potential loss stemming from the tenant’s financial situation.

In contrast, if the tenant were financially stable and perceived as a low-risk entity, the interest rate might be lower, as the likelihood of consistent payments is higher. Therefore, the adjustment to a higher interest rate in scenarios where the tenant is at risk aligns with prudent financial assessment practices, making it the correct answer.