Deck 9: Income-Producing Properties: Leases, Rents, and the Market for Space

Question 1

A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year, but is providing six months of free rent in the first year as a concession. Using a 10 percent discount rate, what is the effective rent over the three years?

A) $17.28
B) $20.00
C) $20.94
D) $21.00
E) $21.73

Answer 1

$17.28

Question 2

Net operating income is the income after deduction of mortgage payments.

Answer 2

False

Question 3

Analysis of effective rents tends to be superior to analysis of total rents over the life of a lease.

Answer 3

True

Question 4

A gross lease is where tenants pay all expenses.

Question 5

Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant?

A) Market rent would decrease; equilibrium occupancy would decrease
B) Market rent would decrease; equilibrium occupancy would increase
C) Market rent would increase; equilibrium occupancy would decrease
D) Market rent would increase; equilibrium occupancy would increase
E) Impossible to determine from the information provided

Question 6

A gross lease is riskier for the lessor than a net lease.

Question 7

Overage rent is rent that exceeds expenses.

Question 8

Consider the figure above. The difference between the existing stock of space and Point D represents:

A) Equilibrium occupancy
B) Market rent
C) Vacancy
D) Shortage
E) Market failure

Question 9

Consider the figure above. Point D represents:

A) Equilibrium occupancy
B) Market rent
C) Vacancy
D) Shortage
E) Market failure

Question 10

The term "percentage rent" refers to rent paid as a percent of space leased.

Question 11

The term "usable area" is typically synonymous with "leaseable area."

Question 12

A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year. Using a 10 percent discount rate, what is the effective rent over the three years?

A) $20.00
B) $20.94
C) $21.00
D) $21.73
E) $22.00

Question 13

Expense stops protect the lessee from unexpected changes in market rents.

Question 14

For which of the following reasons would a business prefer to own space rather than lease it?

A) The business demands specialized or unique facilities
B) Owning allows the business to develop skills in operating, maintaining, and repair real estate and the associated facilities
C) Owning reduces operating flexibility
D) The capital commitments with owning are lower than the capital commitments associated with leasing
E) All of the above are reasons a business would prefer to own space rather than lease it

Question 15

If a lease has free rent earlier in its term, its default risk might be considered slightly higher.

Question 16

CPI adjustments are used to adjust rents by all or part of the increase in the Consumer Price Index.

Question 17

The use of a CPI index in a lease contract shifts risk to the tenant.

Question 18

To attract anchor tenants, property owners tend to charge them lower rents. They make-up for the lower rents by charging the anchor tenant higher CAM charges.

Question 19

Which of the following is NOT a type of commercial property?

A) Single-tenant office building
B) Regional shopping center
C) Warehouse
D) Office/showroom

Question 20

The existing stock of space cannot be adjusted in the short run, but can be increased or decreased in the long run.

Question 21

Which of the following does the term "in-line tenants" refer to?

A) Smaller stores in a mall that are not anchor tenants
B) Tenants whose sales are in line with estimates
C) Tenants who pay their rents on a timely basis
D) All stores located inside the mall, including anchors

Question 22

A clause which requires a tenant in retail space to achieve a certain level of sales or the lease will be terminated is referred to as a:

A) Change clause
B) Termination clause
C) Option clause
D) Santa clause

Question 23

Which of the following is TRUE for a net lease?

A) All expenses are paid by the owner
B) All expenses are paid by the tenant
C) All expenses are paid by the lender
D) All expenses are paid by the investor

Question 24

Which of the following tends to lower effective rents?

A) Percentage rent
B) Step up provisions
C) Concessions
D) CPI adjustment

Question 25

The supply of space is:

A) Inelastic in both the short run and the long run
B) Elastic in both the short run and the long run
C) Relatively inelastic in the short run, and highly elastic in the long run
D) Relatively elastic in the short run, and highly inelastic in the long run

Question 26

Income after deducting vacancy that is available to pay expenses is referred to as:

A) Potential gross income
B) Effective gross income
C) Net operating income
D) Before-tax cash flow

Question 27

A 1,000 square foot office space is leased at $15.00 per square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65 per square foot, and yearly expenses per square foot are as follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end of the lease term. If the lease term is three years and the discount rate is 10%, what is the effective rent per square foot?

A) $9.38
B) $9.50
C) $10.22
D) $10.46

Question 28

Which of the following leads to rent premiums?

A) Apartments on periphery of site, higher floors with no elevators
B) Second or third levels in multi-level malls
C) Middle floors in office building
D) Apartments on higher floors with elevators

Question 29

The difference between the existing stock of space and the equilibrium occupancy is known as:

A) Supply
B) Demand
C) Equilibrium
D) Vacancy

Question 30

Which of the following is FALSE regarding cap rates?

A) Excess supply tends to drive cap rates up
B) Rising interest rates generally tends to lower cap rates
C) Excess demand and falling interest rates results in lower cap rates
D) Excess demand leads to lower cap rates

Question 31

Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord?

A) $5,400
B) $6,000
C) $600
D) $0

Question 32

A clause in a non-anchor tenant's lease requiring the presence of an anchor tenant is referred to as a:

A) Non-compete clause
B) Co-tenancy clause
C) Joint tenancy clause
D) Anchor clause

Question 33

A 1,500 square foot office space is leased at $12.00 square foot. The space is vacant one month out of the year. Office expenses are $6.50 per square foot and an expense stop is set at $6.00 per square foot. What is the annual net operating income?

A) $7,500
B) $6,750
C) $15,750
D) $8,250

Question 34

Which of the following describes the function of an expense stop in a lease?

A) Expenses are stopped from increasing
B) Expenses above the stop are paid by the owner
C) Expenses above the stop are paid by the tenant
D) Expenses below the stop are paid for by the tenant

Question 35

Which of the following does the term "anchor tenant" usually refer to?

A) Someone who leases space
B) The largest tenant in an office building
C) A department store in a mall
D) The tenant who pays the highest rent in a mall

Question 36

The dollar amount by which total rent exceeds base rent under a percentage lease for retail is referred to as:

A) Overage rent
B) Excess rent
C) Percentage rent
D) Marginal rent