Fixed expenses differ from variable expenses in that fixed expenses:
Correct Answer
C) Do not change materially with occupancy, like taxes and insurance
In this classification, fixed expenses do not vary directly and materially with occupancy over the relevant period. They can still change with premiums, tax rates or other factors over time. They need not be largest, commercial-only or disappear when vacant.
Why This Is the Correct Answer
Option C is correct because fixed expenses, such as real estate taxes and insurance, do not change materially with the level of occupancy. Variable expenses, such as utilities, change with occupancy or use. Fixed expenses can still change over time with tax rates or premiums, but not because occupancy changes.
Why the Other Options Are Wrong
Option A: Apply to commercial property types rather than residential ones
Option A says fixed expenses apply to commercial property types rather than residential ones. The fixed and variable classification applies to income properties of any type, including residential rentals.
Option B: Are the largest line item on the operating statement
Option B says fixed expenses are the largest line item on the operating statement. The classification depends on how an expense responds to occupancy, not on its size.
Option D: Stop once the building becomes fully vacant
Option D says fixed expenses stop once the building becomes fully vacant. Taxes and insurance continue even when a building is empty, which is what makes them fixed.
Fixed stays put
Fixed expenses stay put when occupancy changes; variable expenses vary with occupancy.
How to use: Use this to classify any expense line by asking whether it would change if the building emptied.
Exam Tip
Ask whether the expense would continue in a vacant building; if it would, it is likely fixed.
Common Mistakes to Avoid
- -Assuming fixed expenses never change over time
- -Classifying expenses by size instead of behavior
- -Treating utilities as fixed expenses
Concept Deep Dive
Analysis
This question tests the difference between fixed and variable operating expenses. Fixed expenses do not vary materially with occupancy, while variable expenses rise and fall with occupancy or use. Real estate taxes and insurance are typical fixed expenses.
Background Knowledge
Operating expenses are commonly grouped as fixed expenses, variable expenses, and reserves for replacement. Fixed expenses, like property taxes and insurance, are incurred regardless of occupancy. Variable expenses, like utilities and some maintenance, depend on occupancy and use.
Real-World Application
An appraiser reconstructs the operating statement for a partly vacant apartment building. She keeps taxes and insurance at their full amounts as fixed expenses and adjusts utilities and turnover costs to reflect stabilized occupancy.
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?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
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Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
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Previous Question
The subject property has annual NOI of $96,000. A comparable with annual NOI of $100,000 sold for a cash-equivalent price of $1,250,000. Market data indicate the same price-to-income ratio applies to the subject, and no other adjustments are required. What value is indicated for the subject, to the nearest dollar?
Next Question
An appraiser derives an overall rate of 7.5% from four sales ranging from 6.9% to 8.2%. The conclusion should: