Tenant improvement allowances and leasing commissions in an office building are typically:

Correct Answer

A) Treated as capital or below-line items, not operating expenses

Why this is correct: Tenant improvement allowances and leasing commissions are capital expenditures (CapEx) or 'below-line' items. They are not regular annual operating expenses because they occur in lump sums tied to specific leasing events, not continuously. In a discounted cash flow (DCF) model, they are forecast and deducted in the specific years they are expected to occur, which is a key reason office properties are analyzed with DCF rather than simple direct capitalization. Why the other choices are wrong: 'Included among the property's ordinary operating expenses' is incorrect because these are capital costs, not recurring operating costs like utilities or management fees. 'Ignored entirely in the income approach' is wrong; they are explicitly modeled in a DCF analysis. 'Added to potential gross income' is incorrect; they are a cost, not income. Exam tip: Remember the 'below-line' concept: operating expenses are above the line to calculate NOI; capital items like TI/LC are below the line and affect cash flow after NOI.