An office building operates under triple net leases with annual base rent of $500,000. Operating expenses total $150,000 annually, all paid by tenants. The property was purchased for $4,200,000 with 75% financing at 5.5% interest. What is the property's NOI?

Q: What is the correct answer to: An office building operates under triple net leases with annual base rent of $500,000. Operating expenses total $150,000 annually, all paid by tenants. The property was purchased for $4,200,000 with 75% financing at 5.5% interest. What is the property's NOI?

The correct answer is $650,000. Option C ($650,000) correctly calculates NOI under triple net lease structure. In triple net leases, tenants pay base rent ($500,000) plus reimburse all operating expenses ($150,000). From the landlord's perspective, NOI includes both base rent and expense recoveries as income, minus operating expenses paid by the owner. Since tenants reimburse all $150,000 in operating expenses, the landlord receives $500,000 + $150,000 = $650,000 in total income with no operating expense deductions, resulting in NOI of $650,000.

Q: What background knowledge is needed for this Commercial Real Estate question?

Net Operating Income (NOI) represents a property's annual income after operating expenses but before debt service and capital expenditures. In commercial real estate, lease structures vary significantly. Triple net leases require tenants to pay base rent plus their share of property taxes, insurance, and maintenance costs. This differs from gross leases where landlords pay operating expenses. Under TRESA and provincial regulations, real estate professionals must understand these calculations for accurate property valuations and investment analysis. NOI is crucial for determining capitalization rates, property values, and investment returns in commercial transactions.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

Think of NOI under triple net leases like a restaurant where customers pay for their meal (base rent) PLUS reimburse the restaurant for utilities and maintenance (expense recoveries). The restaurant owner receives both payments as total income, with no operating expense burden since customers cover everything. When you see 'triple net lease' on the exam, immediately think 'base rent PLUS expense recoveries equals NOI' because tenants pay all operating costs, giving the landlord both income streams with no expense deductions.

Q: What exam tip applies to this Commercial Real Estate question?

For triple net lease NOI questions, add base rent plus expense recoveries. Ignore financing details and don't subtract operating expenses since tenants reimburse them all.

Q: How does this Commercial Real Estate concept apply in real world practice?

A commercial real estate agent represents a client purchasing a retail plaza with triple net leases. Each tenant pays $20/sq ft base rent plus their proportionate share of $5/sq ft in operating expenses. When calculating the property's NOI for investment analysis, the agent must include both the base rent income and expense recovery income ($25/sq ft total) since tenants reimburse all operating costs. This accurate NOI calculation is essential for determining the property's value using capitalization rates and comparing it to other investment opportunities.

Question

Commercial Real EstateInvestment AnalysisABHARD

An office building operates under triple net leases with annual base rent of $500,000. Operating expenses total $150,000 annually, all paid by tenants. The property was purchased for $4,200,000 with 75% financing at 5.5% interest. What is the property's NOI?

Answer Options

A

$350,000

B

$500,000

C

$650,000

D

$827,250