A lease requires tenants to pay their own utilities directly to suppliers. Those payments are not received or paid by the landlord. What follows for the landlord’s operating statement?
Correct Answer
A) Record neither a landlord utility expense nor reimbursement income.
Under the stated contract, the landlord has no payment or reimbursement for utilities paid directly to suppliers by tenants. Compare rent and expense allocations on like terms; market rent may differ from gross-service arrangements but no automatic direction or amount follows for NOI or vacancy.
Why This Is the Correct Answer
Option A is correct because utilities paid by tenants directly to suppliers do not pass through the landlord's hands, so they are neither a landlord expense nor reimbursement income. The landlord's statement should show only what the landlord actually receives and pays under the lease.
Why the Other Options Are Wrong
Option B: Record all tenant utility payments as landlord expenses without related income.
Option B, recording all tenant utility payments as landlord expenses without related income, would charge the landlord for costs it does not pay. That understates NOI and misrepresents the lease, since the tenants pay these bills directly.
Option C: Raise the vacancy allowance because tenants pay utilities.
Option C, raising the vacancy allowance because tenants pay utilities, links two unrelated items. Who pays utilities does not by itself change expected vacancy or collection loss.
Option D: Assume NOI is unchanged without comparing the lease rent terms to market
Option D, assuming NOI is unchanged without comparing the lease rent terms to market, skips a needed step. Market rent may differ between gross-service and tenant-paid arrangements, so the analyst compares rent and expense allocations on like terms rather than assuming a result.
Follow the money's path
If the dollars do not touch the landlord's account, they do not belong on the landlord's operating statement.
How to use: Use this check whenever a lease shifts expenses to tenants who pay vendors directly.
Exam Tip
Separate the question of what goes on the statement from the question of whether rent is at market; the second needs a comparison, not an assumption.
Common Mistakes to Avoid
- -Listing tenant-paid utilities as a landlord expense
- -Adding a matching reimbursement income line for money the landlord did not receive
- -Assuming lease expense terms by themselves change vacancy
Concept Deep Dive
Analysis
This question tests how to build a landlord's operating statement when tenants pay certain costs directly. If the landlord neither receives nor pays the utility money, it is not landlord income or expense. The analyst then compares rent and expense allocations on like terms rather than assuming any automatic change to NOI or vacancy.
Background Knowledge
Lease structure determines which operating expenses fall on the landlord and which on the tenant. Under net-type arrangements, tenants pay certain costs directly, and those costs do not appear on the landlord's statement. Comparable rents must be analyzed on the same expense basis so that rent and expenses are consistent.
Real-World Application
An appraiser reviewing a strip center finds that each tenant has its own electric meter and pays the utility company directly. The appraiser leaves electricity off the landlord's expense list and compares the subject's rents to comparables leased on similar tenant-paid terms.
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