Chapter 11 Flashcards
What is an operating expense escalation?
It is a clause that provides for reimbursement of increases in the owner’s cost of operating the property,
Why are the operating expense escalations necessary?
They allow the owner to recoup increased costs of running the building due to inflation and other factors.
Describe a net lease.
A type of lease that requires tenants to pay debt service, profit, repairs, and insurance to the lessor. The tenant pays property taxes separately.
Describe a double net lease.
A type of lease that requires the tenant to pay debt service, profit, and repairs to the lessor. The tenant pays insurance and property taxes separately.
Describe a triple net lease.
A lease that requires tenants to pay separately for their share of all building expenses. Rental payments cover only debt service and profit.
Why are expense classifications important?
They allow us to identify expenses that can be passed on to the tenant.
What are the typical common expense categories?
Real property taxes
Operating expenses
Common area maintenance
Describe Common Area Maintenance (CAM) charges.
The expenses incurred to maintain the sidewalks, parking lots, landscaping, and other common areas of the property.
What is a modified gross lease?
A lease requiring the tenant top pay for operating expenses over a pre-established amount.
What is an expense stop?
(also called base amount)
A set amount of operating expenses paid by the landlord.
What is a gross lease?
A lease with base rent only.
What is the formula for calculating the tenants share of cost increases?
tenant’s share=(Escalatable Cost Pool-Base Amount)*tenant’s pro rata share
Define escalatable costs.
The expenses identified from the building operating costs that can increase.
Why is it important that each expense account category contain 12 full months of activity?
When using the cash basis method of accounting, having 12 full months of activity for each account can be said to reasonably conform to the accrual accounting requirements.
List several typical expenses that are excluded from the escalatable cost pool.
leasing commissions depreciation professional fees advertising franchise and income taxes interest and amortization of debt service legal fees capital expenses building improvements tenant improvements non-operating owner expenses reimbursed operating expenses ground rents
Why do many leases provide the tenant with the right to audit the books and records of the landlord?
It allows the tenant to verify that the landlord has applied proper account treatment for all expenses included in the escalatable cost pool.
Define pro rata share.
The portion of the escalatable cost pool the tenant pays when not occupying 100% of the building.
What is the most common pro rata share calculation?
pro rata=tenant’s rented square footage/total rentable square footage
What is the difference between a base year and an expense stop?
A base year is the typical operating expenses from a typical year while an expense stop is a predetermined amount.
What is a cap?
It is a limit on the amount of increase in any one year, usually expressed as a percentage
How should escalation charges be communicated to the tenant?
Delicately and providing as much detail for the escalations as possible to help them understand the reason for extra charges.
It may be helpful to have an independent auditor complete an audit of escalatable charges prior to communicating with the tenant.
What is a Consumer Price Index (CPI) increase?
An increase in base rent to account for inflation based on changes to the CPI.
What are base index and an anniversary index?
A base index is the value of a dollar of rent adjusted for inflation using the CPI during the month of lease commencement.
An anniversary index is the value of a dollar of rent adjusted for inflation using the CPI on each lease anniversary date.
What is the purpose of percentage rent?
It encourages the owner to participate in the success of retail tenants and helps them to recoup the cost costs of advertising to drive business to the retailer.
What is a kick-out clause?
It is a clause that allows the landlord to terminate a lease when the tenant does not reach an agreed upon sales level after a period of time.
What is a triple net lease?
It is a lease requiring the tenant to pay for his share of building operating expenses such as real estate taxes, operating expenses, and insurance
What is the basic calculation for figuring a tenant’s share of a cost increase?
tenant’s share=(escalatable cost pool-base amount)*tenant’s pro rata share
How are pro rata shares determined?
They are stated in the rent as either a percentage or a calculation will be defined in the lease.
pro rata=tenant’s occupied square footage/total rental square footage.
Explain how to calculate a CPI increase.
The annual increase percentage is usually some fraction of CPI increase.
Increases are determined by comparing anniversary CPI index to base CPI index
Costs are typically accumulated into which major categories for additional rent purposes?
a) taxes, utilities, operating expenses
b) taxes, operating expenses, common area maintenance charges
c) taxes, insurance, non-operating expenses
d) taxes, utilities, common area maintenance charges
b) taxes, operating expenses, common area maintenance charges
Which lease format requires the tenant to share in all costs of operating the building?
a) triple net
b) modified gross
c) gross
d) single net
a) triple net
Base amounts are stated in which lease type?
a) triple net
b) modified gross
c) gross
d) single net
b) modified gross
Operating expenses for the current year are $2,227,486. The tenant’s base year operating expenses are $2,036,895. The tenant’s pro rata share is 13.56%. What is their annual additional rent for operating expense escalations?
a) $2,153.68
b) $25,844.00
c) $190,591.00
d) $2,227,486.00
b) 25,844.00
The tenant’s annual base rent is $240,000. The CPI index for the base year is 158.5 and the CPI index for the current year for the current year is 165.7. What is the tenant’s annual additional rent for 100% of the CPI increase?
a) $1,440
b) $10,428
c) $10,896
d) $17,280
c) $10,896
(annual CPI index-base index)/base index to two decimal point* base rent
Most escalation charges are:
a) charged quarterly
b) spread out over a twelve month period
c) charged at the end of the lease term
d) taken out of the security deposit
b) spread out over a twelve month period
A tenant pro rata share is typically calculated by dividing the:
a) building’s square footage by the tenant’s square footage
b) tenant’s usable square footage by the building’s usable square footage
c) tenant’s gross square footage by the building’s gross square footage
d) tenant’s rentable square footage by the building’s rentable square footage
d) tenant’s rentable square footage by the building’s rentable square footage
The owner’s mechanism to maintain the equity value of the base rent dollar is known as:
a) CPI increase
b) interest charges
c) stepped rents
d) other income
a) CPI increase
