Real Estate Finance and Investments

14th Edition Brueggeman Test Bank

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 CHAPTER 9
Income-Producing Properties: Leases, Rents, and the Market for Space

TRUE/FALSE

1. Analysis of effective rents tends to be superior to analysis of total rents over the life of a
lease. (T)

2. The existing stock of space cannot be adjusted in the short run, but can be increased or
decreased in the long run. (T)

3. To attract anchor tenants, property owners tend to charge them lower rents. They make-up
for the lower rents by charging the anchor tenant higher CAM charges. (F)

4. Overage rent is rent that exceeds expenses. (F)

5. The term “percentage rent” refers to rent paid as a percent of space leased. (F)

6. A gross lease is where tenants pay all expenses. (F)

7. The term “usable area” is typically synonymous with “leaseable area.” (F)

8. The use of a CPI index in a lease contract shifts risk to the tenant. (F)

9. Expense stops protect the lessee from unexpected changes in market rents. (T)

10. A gross lease is riskier for the lessor than a net lease. (F)

11. Net operating income is the income after deduction of mortgage payments. (F)

12. If a lease has free rent earlier in its term, its default risk might be considered slightly higher.
(F)

13. CPI adjustments are used to adjust rents by all or part of the increase in the Consumer Price
Index. (T)

MULTIPLE CHOICE

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14. Consider the figure above. Point D represents: (B)

(A) Equilibrium occupancy

(B) Market rent
(C) Vacancy
(D) Shortage
(E) Market failure

15. Consider the figure above. The difference between the existing stock of space and Point D
represents: (C)

(A) Equilibrium occupancy

(B) Market rent
(C) Vacancy
(D) Shortage
(E) Market failure

16. Consider the figure above. If the demand for units increases, what would happen in
equilibrium, holding everything else constant? (D)

(A) Market rent would decrease; equilibrium occupancy would decrease

(B) Market rent would decrease; equilibrium occupancy would increase
(C) Market rent would increase; equilibrium occupancy would decrease
(D) Market rent would increase; equilibrium occupancy would increase
(E) Impossible to determine from the information provided

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17. For which of the following reasons would a business prefer to own space rather than lease
it? (A)

(A) The business demands specialized or unique facilities

(B) Owning allows the business to develop skills in operating, maintaining, and repair real
estate and the associated facilities
(C) Owning reduces operating flexibility
(D) The capital commitments with owning are lower than the capital commitments
associated with leasing
(E) All of the above are reasons a business would prefer to own space rather than lease it

18. A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in
the third year. Using a 10 percent discount rate, what is the effective rent over the three
years? (B)

(A) $20.00
(B) $20.94
(C) $21.00
(D) $21.73
(E) $22.00

19. A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in
the third year, but is providing six months of free rent in the first year as a concession. Using
a 10 percent discount rate, what is the effective rent over the three years? (A)

(A) $17.28
(B) $20.00
(C) $20.94
(D) $21.00
(E) $21.73

20. Which of the following is NOT a type of commercial property? (C)

(A) Single-tenant office building

(B) Regional shopping center
(C) Warehouse
(D) Office/showroom

21. The difference between the existing stock of space and the equilibrium occupancy is known
as: (D)

(A) Supply
(B) Demand
(C) Equilibrium
(D) Vacancy

22. The dollar amount by which total rent exceeds base rent under a percentage lease for retail
is referred to as: (A)

(A) Overage rent

(B) Excess rent

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 (C) Percentage rent
(D) Marginal rent

23. The supply of space is: (C)

(A) Inelastic in both the short run and the long run
(B) Elastic in both the short run and the long run
(C) Relatively inelastic in the short run, and highly elastic in the long run
(D) Relatively elastic in the short run, and highly inelastic in the long run

24. Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease
specifies an expense stop of $5.40. What is the total expense paid by the landlord? (A)

(A) $5,400
(B) $6,000
(C) $600
(D) $0

25. A 1,500 square foot office space is leased at $12.00 square foot. The space is vacant one
month out of the year. Office expenses are $6.50 per square foot and an expense stop is set
at $6.00 per square foot. What is the annual net operating income? (A)

(A) $7,500
(B) $6,750
(C) $15,750
(D) $8,250

26. A clause which requires a tenant in retail space to achieve a certain level of sales or the
lease will be terminated is referred to as a: (A)

(A) Kickout clause

(B) Termination clause
(C) Option clause
(D) Santa clause

27. A clause in a non-anchor tenant’s lease requiring the presence of an anchor tenant is
referred to as a: (B)

(A) Non-compete clause

(B) Co-tenancy clause
(C) Joint tenancy clause
(D) Anchor clause

28. Income after deducting vacancy that is available to pay expenses is referred to as: (B)

(A) Potential gross income

(B) Effective gross income
(C) Net operating income
(D) Before-tax cash flow

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29. A 1,000 square foot office space is leased at $15.00 per square foot during the first year
with $2.00 step-up provisions each of the following years. The lease is gross with an
expense stop set at $6.65 per square foot, and yearly expenses per square foot are as
follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end
of the lease term. If the lease term is three years and the discount rate is 10%, what is the
effective rent per square foot? (B)

(A) $9.38
(B) $9.50
(C) $10.22
(D) $10.46

30. Which of the following does the term “anchor tenant” usually refer to? (C)

(A) Someone who leases space

(B) The largest tenant in an office building
(C) A department store in a mall
(D) The tenant who pays the highest rent in a mall

31. Which of the following describes the function of an expense stop in a lease? (C)

(A) Expenses are stopped from increasing

(B) Expenses above the stop are paid by the owner
(C) Expenses above the stop are paid by the tenant
(D) Expenses below the stop are paid for by the tenant

32. Which of the following is TRUE for a net lease? (B)

(A) All expenses are paid by the owner

(B) All expenses are paid by the tenant
(C) All expenses are paid by the lender
(D) All expenses are paid by the investor

33. Which of the following tends to lower effective rents? (C)

(A) Percentage rent

(B) Step up provisions
(C) Concessions
(D) CPI adjustment

34. Which of the following does the term “in-line tenants” refer to? (A)

(A) Smaller stores in a mall that are not anchor tenants

(B) Tenants whose sales are in line with estimates
(C) Tenants who pay their rents on a timely basis
(D) All stores located inside the mall, including anchors

35. Which of the following is FALSE regarding cap rates? (B)

(A) Excess supply tends to drive cap rates up

(B) Rising interest rates generally tends to lower cap rates

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 (C) Excess demand and falling interest rates results in lower cap rates
(D) Excess demand leads to lower cap rates

36. Which of the following leads to rent premiums? (D)

(A) Apartments on periphery of site, higher floors with no elevators

(B) Second or third levels in multi-level malls
(C) Middle floors in office building
(D) Apartments on higher floors with elevators

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