An office building is leased on triple net terms with annual base rent of $500,000. Operating expenses of $150,000 a year are all paid by the tenants. The owner bought it for $4,200,000 with 75% financing at 5.5% interest. What is the property's net operating income?
Correct Answer
D) $500,000
Under a triple net lease the tenants bear the $150,000 of operating expenses, so the owner keeps the full $500,000 of base rent with no unrecovered operating costs, and NOI = $500,000. Even if the owner paid the expenses and billed them back, $650,000 collected minus $150,000 paid still gives $500,000. Debt service is not an operating expense, so the 5.5% interest on the $3,150,000 loan is excluded from NOI.
Why This Is the Correct Answer
The tenants cover the $150,000 of operating expenses, so the owner's net operating income is the $500,000 base rent. Recoveries and expenses offset each other, and interest is excluded from NOI.
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