A lease expressly makes the landlord responsible for all listed property operating expenses from rent, with no tenant reimbursement. Which description fits these terms?
Correct Answer
C) Full-service gross expense allocation.
Under the expressly full-service gross terms, the landlord pays the specified property expenses from rent. Actual gross/net labels vary, so analyze the contract rather than assuming every cost allocation from the name. Rent level and lease term are not fixed by that label.
Why This Is the Correct Answer
Option C is correct because a full-service gross lease places the specified property operating expenses on the landlord, paid from rent, with no tenant reimbursement. Office buildings are commonly leased on a gross basis with expenses paid by the landlord, though actual terms should be read from the lease rather than assumed from a label.
Why the Other Options Are Wrong
Option A: A tenant obligation to pay the listed expenses on top of rent.
Option A describes a tenant obligation to pay the listed expenses on top of rent. That is a net arrangement, the opposite of these terms, which make the landlord responsible with no tenant reimbursement.
Option B: A percentage-rent clause based on tenant sales.
Option B describes a percentage-rent clause based on tenant sales. Percentage rent concerns additional rent tied to sales and says nothing about who pays operating expenses.
Option D: A lease term shorter than five years.
Option D describes a lease term shorter than five years. The facts concern who pays operating expenses, not lease duration, and a full-service gross label does not fix the lease term.
Gross Means Landlord Pays
In a full-service gross lease, the rent covers the operating expenses and the landlord pays them. Net leases shift expenses toward the tenant.
How to use: Use this to identify the lease type from who pays the operating expenses.
Exam Tip
Focus on who pays the expenses in the facts; options about sales or lease length do not answer an expense-allocation question.
Common Mistakes to Avoid
- -Confusing gross and net lease structures
- -Assuming the lease label fixes every cost allocation without reading the lease
- -Mixing up percentage rent with expense allocation
Concept Deep Dive
Analysis
This question tests lease expense allocation terminology. When the landlord pays all listed operating expenses from rent with no tenant reimbursement, the lease is full-service gross. The other options describe a net arrangement, a sales-based clause or a lease term, none of which match the stated terms.
Background Knowledge
Leases allocate operating expenses between landlord and tenant along a range from gross to net. In a full-service gross lease, the landlord pays the operating expenses from rent, while in net leases the tenant pays some or all of them; labels vary, so appraisers analyze the actual lease terms.
Real-World Application
An appraiser reviewing the leases on a duplex finds that tenants pay one all-inclusive rent and the landlord pays taxes, insurance, utilities and lawn care. The appraiser treats those leases as gross and deducts the full operating expenses in the income analysis.
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An appraiser is developing an overall rate for a 40-unit apartment building and has three indications. Five recent, verified sales of similar buildings show rates of 7.5% to 7.7%, centered on 7.6%. A band of investment using typical loan terms and one investor's stated equity dividend rate shows 7.3%. A debt coverage calculation using a lender's minimum ratio, the typical mortgage constant and loan-to-value ratio shows 5.5%. Which rate and reasoning are best?
Next Question
The subject property has annual contract potential rent of $110,000, less a $10,000 free-rent concession. Combined vacancy and collection loss is 4% of the rent remaining after the concession, and annual property expenses total $16,000. The concession is not included in any other deduction. At a 10% overall rate, what is the indicated value?