In an apartment operating model, which stated cost is most directly variable with occupancy and tenant consumption?
Correct Answer
C) Landlord-paid consumption-metered utilities.
Consumption-metered utilities can vary with use and occupancy under the stated terms. Fixed-period taxes and insurance do not vary directly with occupancy in this model, although they can change between periods. Mortgage interest is excluded from property NOI as financing cost.
Why This Is the Correct Answer
Option C is correct because landlord-paid utilities metered by consumption vary with how many units are occupied and how much tenants use. That makes them a variable expense. Fixed-period taxes and insurance do not move directly with occupancy in this model.
Why the Other Options Are Wrong
Option A: Property insurance that is fixed for the policy period.
Option A is wrong because property insurance fixed for the policy period does not change with occupancy or tenant use during that period. It is a classic fixed expense, though it may change at renewal.
Option B: Real-estate taxes fixed for the assessment period.
Option B is wrong because real estate taxes fixed for the assessment period do not vary with occupancy or consumption. They are a fixed expense, even though they can change between periods.
Option D: Mortgage interest, which is a financing cost.
Option D is wrong because mortgage interest is a financing cost, not a property operating expense. It is excluded from NOI and is not classified as fixed or variable operating expense.
Usage drives variable costs
If more tenants using the building means a bigger bill, the expense is variable; if the bill is set for the period regardless, it is fixed.
How to use: Use this test to sort each expense line on an operating statement.
Exam Tip
Eliminate debt-related items first because they are not operating expenses. Then ask which remaining cost actually changes with occupancy or consumption.
Common Mistakes to Avoid
- -Including mortgage interest in operating expenses
- -Treating property taxes as variable with occupancy
- -Holding consumption-based utilities flat when occupancy changes
Concept Deep Dive
Analysis
This question tests the difference between fixed and variable operating expenses. Fixed expenses do not change with occupancy or use, while variable expenses rise and fall with occupancy and tenant consumption. The task is to pick the stated cost tied to use, and to recognize that financing costs are not operating expenses at all.
Background Knowledge
Operating expenses are commonly grouped as fixed expenses, variable expenses and replacement reserves. Fixed expenses such as taxes and insurance stay level regardless of occupancy, while variable expenses such as utilities and some repairs change with occupancy and use. Debt service is a financing item and sits below NOI.
Real-World Application
An appraiser reconstructs expenses for a partly vacant fourplex where the landlord pays metered water. As occupancy is projected to stabilize, the appraiser increases the water expense while holding insurance and taxes at their fixed-period amounts.
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 potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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The subject property has annual EGI of $112,000. A comparable with annual EGI of $110,000, measured on the same basis, sold for a cash-equivalent price of $946,000. Market data indicate the subject would sell at the same price-to-income ratio, with no other adjustments. What value is indicated for the subject, rounded to the nearest dollar?