While reviewing an answer in the CFA book, there was a statement that I could not get!
Exhibit 1. Selected Property Data
Property #1
Property #2
Property #3
Property Type
Downtown Office Building
Grocery-Anchored Retail Center
Multi-Family
Building
Location
New York, NY
Miami, FL
Boston, MA
Occupancy
90.00%
93.00%
95.00%
Square Feet or Number of Units
100,000 sf
205,000 sf
300 units
Gross Potential Rent
$4,250,000
$1,800,000
$3,100,000
Expense Reimbursement Revenue
$330,000
$426,248
$0
Other Income (includes % Rent)
$550,000
$15,000
$45,000
Potential Gross Income
$5,130,000
$2,241,248
$3,145,000
Vacancy Loss
($513,000)
($156,887)
($157,250)
Effective Gross Income
$5,079,000
$2,084,361
$2,987,750
Property Management Fees
($203,160)
($83,374)
($119,510)
Other Operating Expenses
($2,100,000)
($342,874)
($1,175,000)
Net Operating Income (NOI)
$2,775,840
$1,658,113
$1,693,240
Which of the following is most likely accurate regarding Property #2 described in Exhibit 1?
Operating expense risk is borne by the owner.
The lease term for the largest tenant is greater than three years.
There is a significant amount of percentage rent linked to sales levels.
Answer:
B is correct. The lease term for the anchor tenant is typically longer than the usual 3 to 5 year term for smaller tenants. The data in Exhibit 1 suggest that the operating expenses are passed on to the tenant; the sum of Property Management Fees and Other Operating Expenses equal the Expense Reimbursement Revenue. Also, Other Income is only $15,000 suggesting that there is a minimal amount of percentage rent linked to sales thresholds.
1. how do we know that “The lease term for the anchor tenant is typically longer than the usual 3 to 5 year term for smaller tenants”
2. Do not get how the sum of Property Management Fees and Other Operating Expenses equal the Expense Reimbursement Revenue?
3. What does the ”sum of Property Management Fees and Other Operating Expenses equal the Expense Reimbursement Revenue” mean?