Why is evaluating contract rents against market rents critical in determining property value?

Evaluating contract rents against market rents is vital in determining property value because it helps assess the property's income-generating potential relative to prevailing market rates. This analysis is crucial when reconstructing the operating statement, as it provides insights into whether the current contract rents are aligned with or deviating from the market. If the contract rents are significantly lower than market rents, it may indicate that the property could generate more income, ultimately enhancing its value. Conversely, if the contract rents are higher than what the market will support, it may lead to concerns about vacancy rates and tenant retention, which can negatively impact the property's value. Therefore, assessing this comparison directly informs the operating statement, providing a clearer picture of the property's financial health and future potential.