Part 5

Question 1

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

Answer 1

Gross lease.

1/2 bases used to set up leases.

Question 2

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

Answer 2

Net lease.

2/2 bases used to set up leases.

Question 3

A lease with a specified level of rent that continues throughout the lease term; also called level payment lease.

Answer 3

Flat rental lease.

1/5 Lease types

Question 4

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

Answer 4

Graduated rental lease.

2/5 Lease types

Question 5

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.

Answer 5

Revaluation lease.

3/5 Lease types

Question 6

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.

Answer 6

Index lease.

4/5 Lease types

Question 7

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. This type of lease is frequently used for retail. Most leases specify a guaranteed minimum rent with overages possible.

Answer 7

Percentage lease.

5/5 Lease types

Question 8

The actual rental income specified in a lease.

Answer 8

Contract rent.

Note. Contract and scheduled rent are often the same; however, there are situations where they differ. For example, a one-year lease might indicate a monthly contract rent of $1,200, but the tenant is given one month of free rent as an inducement. Therefore, assuming the free rent was amortized over the term, the monthly scheduled rent (as well as the effective rent) is $1,100. When calculating scheduled rent, adjust for rent concessions, discounts, or other benefits that induce a prospective tenant to enter into a lease.

Question 9

Income due under existing leases.

Answer 9

Scheduled rent.

Note. Contract and scheduled rent are often the same; however, there are situations where they differ. For example, a one-year lease might indicate a monthly contract rent of $1,200, but the tenant is given one month of free rent as an inducement. Therefore, assuming the free rent was amortized over the term, the monthly scheduled rent (as well as the effective rent) is $1,100. When calculating scheduled rent, adjust for rent concessions, discounts, or other benefits that induce a prospective tenant to enter into a lease.

Question 10

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.

Answer 10

Market rent

Question 11

Total base rent, or minimum rent stipulated in a lease, over the specified lease term minus rent concessions.

Answer 11

Effective rent

Question 12

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

Answer 12

Deficit rent

Question 13

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

Answer 13

Excess rent

Question 14

Rental income received in accordance with the terms of a percentage lease; typically derived from retail store and restaurant tenants and based on a certain percentage of their gross sales.

Answer 14

Percentage rent

Question 15

The percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume. This is not excess rent, but is a contract rent.

Answer 15

Overage rent

Question 16

The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.

Answer 16

Potential gross income (PGI)

To use IRV, you need to know the subject’s net operating income (IO). IO is calculated beginning with potential gross income.

includes scheduled rent (contract rent), escalation income (from escalation clauses), and market rent for vacant, soon-to-be-vacant, or owner-occupied space. PGI also includes income from other sources such as parking fees, coin-operated machines, and antenna connections.

Question 17

This allowance is for deductions from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent.

Answer 17

Vacancy and collection loss

Question 18

Operating Statement Worksheet

Potential gross income = PGI

Vacancy/collection losses (minus)

Effective gross income = EGI

Operating expenses (minus) = OE

Net operating income = Io

Debt service (minus)

Pretax cash flow = PTCF

These are the primary components used to develop a complete what?

Answer 18

These are the primary components used to develop a complete income and expense statement for appraisal purposes.

Question 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.

Answer 19

Fixed expenses.

Question 20

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

Answer 20

Variable expenses.

Question 21

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

Answer 21

Operating expense ratio (OER).

The OER is 45% ($54,000 OE / $120,000 EGI). This means that operating expenses consume 45% of all collected income.

Question 22

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

Answer 22

Net income ratio (NIR).

The complement (inverse) of the OER ratio is 55%, which is the amount not consumed by expenses and represents the amount that falls to the bottom line (IO). This complement is called the net income ratio (NIR), or the ratio of net operating income to effective gross income (NOI ÷ EGI). If OER shows how much money was spent, NIR shows how much was collected.

Question 23

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.

Answer 23

Replacement allowance

Examples include roof covering, carpeting, boilers, and driveways.

Question 24

A property has an effective gross income of $60,420. Vacancy and collection loss are estimated at 5% in the market, and operating expenses total $19,156. What is the net operating income (NOI)?

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Answer 24

$41,264

$60,420 EGI - $19,156 OE = $41,264 NOI. Vacany and collection loss is already accounted for in EGI.