A lease provides annual potential base rent of $60,000. The tenant also pays $20,000 of expenses directly to third-party suppliers; the landlord neither receives nor pays these amounts. Combined vacancy and collection loss is 5% of base rent only. What is the landlord's EGI?
Correct Answer
B) $57,000
60000×0.95 = 57000. Common errors: including the tenant's direct payments to suppliers as landlord income gives $76,000; not deducting the 5% loss gives $60,000; deducting the tenant-paid expenses from landlord income gives $37,000.
Why This Is the Correct Answer
Option B is correct because landlord EGI is $60,000 x 0.95 = $57,000. The tenant's $20,000 paid directly to suppliers does not pass through the landlord, so it is neither added as income nor deducted as an expense.
Why the Other Options Are Wrong
Option A: $37,000
Option A, $37,000, is $60,000 x 0.95 - $20,000, which deducts the tenant-paid expenses from landlord income. The landlord does not pay those costs, so EGI stays at $57,000.
Option C: $60,000
Option C, $60,000, is potential base rent without the 5% loss. EGI requires the loss deduction: $60,000 x 0.95 = $57,000.
Option D: $76,000
Option D, $76,000, is ($60,000 + $20,000) x 0.95, which treats the tenant's direct supplier payments as landlord income. Those payments are not landlord receipts, so EGI is $57,000.
Follow the landlord's money
If a dollar does not reach or leave the landlord's account, it does not belong in the landlord's income or expenses.
How to use: Use this test to decide whether tenant-paid costs enter the landlord's EGI.
Exam Tip
Read the lease terms given in the question rather than relying on labels like net or gross; the actual expense allocation controls the calculation.
Common Mistakes to Avoid
- -Adding tenant direct-paid expenses to landlord income
- -Deducting expenses the landlord does not pay
- -Forgetting the vacancy and collection loss
Concept Deep Dive
Analysis
This question tests what counts as landlord income. Expenses the tenant pays directly to third-party suppliers are neither received nor paid by the landlord, so they do not enter the landlord's EGI. Only base rent less the stated 5% loss counts.
Background Knowledge
Effective gross income reflects what the landlord actually expects to collect after vacancy and collection loss. The lease must be read to determine which expenses the landlord or tenant pays; costs a tenant pays directly to suppliers stay outside the landlord's income statement.
Real-World Application
A tenant in a single-tenant building pays the utility and janitorial companies directly. The appraiser builds the landlord's EGI from base rent less vacancy and leaves those direct-paid costs off both the income and expense sides.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
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