Chapter 5

Question 1

Gross lease

Answer 1

The landlord (i.e., lessor) pays all of the operating expenses

Question 2

Net lease

Answer 2

The tenant (i.e., lessee) pays all of the operating expenses

Question 3

Flat rental lease

Answer 3

A lease with a specified level of rent that continues throughout the lease term

Question 4

Graduated rental lease

Answer 4

A lease that provides for specified changes in rent at one or more points during the lease term

Question 5

Step-up lease

Answer 5

The payments increase at specified intervals

Question 6

Step-down lease

Answer 6

The payments decrease at specified intervals

Question 7

Revaluation lease

Answer 7

A lease that provides for periodic rent adjustments based
on the market rental rate of the space. This is sometimes accomplished
through appraisal or arbitration

Question 8

Index lease

Answer 8

A lease, usually for a long term, that provides for periodic rent
adjustments based on the change in an economic index, e.g., a cost-of-living
index

Question 9

Percentage lease

Answer 9

A lease in which the rent or some portion of the rent represents a specified percentage of the volume of business, productivity, or use
achieved by the tenant

Question 10

Contract rent

Answer 10

The actual rental income specified in a lease

Question 11

Scheduled rent

Answer 11

Income due under existing leases

Question 12

Market rent

Answer 12

The most probable rent that a property should bring in a
competitive and open market under all conditions requisite to a fair leas
transaction, the lessee and lessor each acting prudently and knowledgeably, and assuming the rent is not affected by undue stimulus

Question 13

Effective rent

Answer 13

Total base rent, or minimum rent stipulated in a lease

Question 14

Deficit rent

Answer 14

The amount by which market rent exceeds contract rent at the
time of the appraisal

Question 15

Excess rent

Answer 15

The amount by which contract rent exceeds market rent
at the time of the appraisal

Question 16

Percentage rent

Answer 16

Rental income received in accordance with the terms of a
percentage lease

Question 17

Overage rent

Answer 17

The percentage rent paid over and above the guaranteed
minimum rent or base rent

Question 18

Operating expenses

Answer 18

The periodic expenditures necessary to maintain the
real estate and continue production of the effective gross income

Question 19

Fixed expenses

Answer 19

Operating expenses such as property taxes and insurance
that generally do not vary with occupancy and that prudent management will
pay for whether the property is occupied or vacant

Question 20

Operating Statement Workflow Chart:

Answer 20

Question 21

Variable expenses

Answer 21

Operating expenses that generally vary with the level of
occupancy or the extent of services provided

Question 22

Replacement allowance

Answer 22

An allowance that provides for the periodic replacement of [short-lived] building components that wear out more rapidly than the building itself and must be replaced during the building’s economic life

Question 23

Net operating income (NOI or Io)

Answer 23

The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted

Question 24

Mortgage debt service (Im)

Answer 24

The annualized periodic payment for interest on and retirement of the principal of a mortgage loan

Question 25

Pre-tax cash flow (PTCF)

Answer 25

The portion of net operating income that remains after total mortgage debt service is paid but before income tax on operations is deducted

Question 26

Operating expense ratio (OER)

Answer 26

The ratio of total operating expenses to effective gross income (TOE / EGI); the complement of the net income ratio, i.e., OER = 1 − NIR

Question 27

Net income ratio (NIR)

Answer 27

The ratio of net operating income to effective gross income (NOI / EGI); the complement of the operating expense ratio, i.e., NIR = 1 − OER