Chapter 3 Exam Notes

Effective Rent:
- Defined as the average rent payment over the life of a lease.
- Accounts for rent-free periods, tenant improvement allowances, and other concessions.
- Useful for comparing individual leasing alternatives to facilitate informed decisions.
- Method to calculate:
- Compute the present value of the rent stream.
- Convert present value to an equivalent level annuity.
- Evaluate all potential lease alternatives similarly.
- Understand the return to the lessor and cost to the lessee.

Percentage Rent:
- Adjusted based on the tenant’s revenue/sales performance.
- Includes breakpoints and overage provisions:
- Base rent is negotiated (flat or step-up), plus a percentage of sales exceeding a specified breakpoint.
- Overage Rent: Extra rent paid above the base amount triggered by tenant sales performance.
- If retail revenues decline, rents may revert to base rent.

Gross Lease:
- Tenant pays rent only.
- Property owner pays all operating expenses.
- Often referred to as a full-service lease.
Net Lease:
- Tenant pays base rent plus some or all operating expenses (e.g., property taxes, insurance, maintenance).
- Common types include:
- Single Net Lease (N): Tenant pays some operating expenses.
- Double Net Lease (NN): Tenant pays property taxes and insurance.
- Triple Net Lease (NNN): Tenant covers all operating expenses.

Expense Stop Provision:
- Limits the landlord's liability for operating expenses.
- Landlord pays expenses up to a predetermined limit; tenant pays any overage.

Cost Approach:
- Estimate replacement cost of the property.
- Consider depreciation and add land value.
Sales Comparison Approach:
- Compare similar properties and adjust for differences.
- Common adjustment variables include financing terms, property rights, and location.
Income Capitalization Approach:
- Direct Capitalization: ext{Value} = rac{ ext{NOI}}{R}
  - Where NOI is Net Operating Income, and R is the capitalization rate.

Defined as the ratio of property value to stabilized NOI:
R = rac{ ext{NOI}}{ ext{Property Value}}
Factors affecting cap rates include:
- Differences in financing, ownership interest, market conditions, and expected future income.
For built-up cap rate, R = r - g
- Where r = required return, g = growth rate of NOI.

Represents the total income after operating expenses but before debt service and taxes.
Calculated by:
ext{NOI} = ext{Effective Gross Income} - ext{Operating Expenses}
A high cap rate usually correlates with a lower purchase price, while a low cap rate indicates a higher purchase price.

Defined as the most probable price that a property would sell for in an open market:
- Assumptions include well-informed buyers and sellers, reasonable time for market exposure, and cash consideration.

Equity Dividend: ext{Equity Dividend} = ext{NOI} - ext{Debt Service}
- Represents before-tax cash flow from property operations; important for investors.

Depreciation can lower the effective tax rate by allowing deductions of taxable income over time despite assets not losing value.

Co-Tenant Clause:
- Allows tenants to reduce rent or break lease if an essential neighboring tenant leaves.
Anchor Clause:
- Protects the status of anchor tenants in a commercial center.

Appraisals are conducted to estimate the property’s market value to ensure fair pricing for buyers and sellers and to validate loan amounts for lenders.

The rate used to convert future cash flows to present value; reflects the risk and opportunity cost associated with the investment.
Higher risks correlate with higher discount rates which result in lower present values.

Functional Obsolescence:
- Structural deficiencies, outdated layouts relative to current needs.
External Obsolescence:
- Influenced by environmental factors such as traffic congestion, noise pollution, etc.