Formula and explanations for attached questions from Real Estate Finance And Investments Course Chapter Nine Test Bank Solutions

Formula and explanations for CHAPTER 9 Income-Producing Properties: Leases, Rents, and the Market for Space TRUE/FALSE 1. Analysis of effective rents tends to be superior to analysis of total rents over the life of a lease. (T) 2. The existing stock of space cannot be adjusted in the short run, but can be increased or decreased in the long run. (T) 3. 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. (F) 4. Overage rent is rent that exceeds expenses. (F) 5. The term \"percentage rent\" refers to rent paid as a percent of space leased. (F) 6. A gross lease is where tenants pay all expenses. (F) 7. The term \"usable area\" is typically synonymous with \"leaseable area.\" (F) 8. The use of a CPI index in a lease contract shifts risk to the tenant. (T) 9. Expense stops protect the lessee from unexpected changes in market rents. (T) 10. A gross lease is riskier for the lessor than a net lease. (F) 11. Net operating income is the income after deduction of mortgage payments. (F) 12. If a lease has free rent earlier in its term, its default risk might be considered slightly higher. (F) 13. CPI adjustments are used to adjust rents by all or part of the increase in the Consumer Price Index. (T) MULTIPLE CHOICE -1- 14. Consider the figure above. Point D represents: (B) (A) Equilibrium occupancy (B) Market rent (C) Vacancy (D) Shortage (E) Market failure 15. Consider the figure above. The difference between the existing stock of space and Point D represents: (C) (A) Equilibrium occupancy (B) Market rent (C) Vacancy (D) Shortage (E) Market failure 16. Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant? (D) (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 -2- 17. For which of the following reasons would a business prefer to own space rather than lease it? (A) (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 18. 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? (B) (A) $20.00 (B) $20.94 (C) $21.00 (D) $21.73 (E) $22.00 19. 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) (A) $17.28 (B) $20.00 (C) $20.94 (D) $21.00 (E) $21.73 20. Which of the following is NOT a type of commercial property? (C) (A) Single-tenant office building (B) Regional shopping center (C) Warehouse (D) Office/showroom 21. The difference between the existing stock of space and the equilibrium occupancy is known as: (D) (A) Supply (B) Demand (C) Equilibrium (D) Vacancy 22. The dollar amount by which total rent exceeds base rent under a percentage lease for retail is referred to as: (A) (A) Overage rent (B) Excess rent -3- (C) Percentage rent (D) Marginal rent 23. The supply of space is: (C) (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 24. 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) (A) $5,400 (B) $6,000 (C) $600 (D) $0 25. 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) (A) $7,500 (B) $6,750 (C) $15,750 (D) $8,250 26. 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: (B) (A) Change clause (B) Termination clause (C) Option clause (D) Santa clause 27. A clause in a non-anchor tenant's lease requiring the presence of an anchor tenant is referred to as a: (B) (A) Non-compete clause (B) Co-tenancy clause (C) Joint tenancy clause (D) Anchor clause 28. Income after deducting vacancy that is available to pay expenses is referred to as: (B) (A) Potential gross income (B) Effective gross income (C) Net operating income (D) Before-tax cash flow -4- 29. 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? (B) (A) $9.38 (B) $9.50 (C) $10.22 (D) $10.46 -5- 30. Which of the following does the term \"anchor tenant\" usually refer to? (C) 31. 32. (A) Someone who leases space 33. (B) The largest tenant in an office building 34. (C) A department store in a mall 35. (D) The tenant who pays the highest rent in a mall 36. 37. Which of the following describes the function of an expense stop in a lease? (C) 38. 39. (A) Expenses are stopped from increasing 40. (B) Expenses above the stop are paid by the owner 41. (C) Expenses above the stop are paid by the tenant 42. (D) Expenses below the stop are paid for by the tenant 43. 44. Which of the following is TRUE for a net lease? (B) 45. 46. (A) All expenses are paid by the owner 47. (B) All expenses are paid by the tenant 48. (C) All expenses are paid by the lender 49. (D) All expenses are paid by the investor 50. 51. Which of the following tends to lower effective rents? (C) 52. 53. (A) Percentage rent 54. (B) Step up provisions 55. (C) Concessions 56. (D) CPI adjustment 57. 58. Which of the following does the term \"in-line tenants\" refer to? (A) 59. 60. (A) Smaller stores in a mall that are not anchor tenants 61. (B) Tenants whose sales are in line with estimates 62. (C) Tenants who pay their rents on a timely basis 63. (D) All stores located inside the mall, including anchors 64. 65. Which of the following is FALSE regarding cap rates? (B) 66. 67. (A) Excess supply tends to drive cap rates up 68. (B) Rising interest rates generally tends to lower cap rates 69. (C) Excess demand and falling interest rates results in lower cap rates 70. (D) Excess demand leads to lower cap rates 71. 72. Which of the following leads to rent premiums? (D) 73. 74. (A) Apartments on periphery of site, higher floors with no elevators 75. (B) Second or third levels in multi-level malls 76. (C) Middle floors in office building 77. (D) Apartments on higher floors with elevators -6