ASC Cash Flow Analysis 2 — Questions and Answers
Question 1: In Argus Enterprise, which cash flow line item represents the difference between Potential Gross Revenue and Effective Gross Revenue?
- Net Operating Income
- Vacancy & Credit Loss (Correct answer)
- Operating Expenses
- Capital Expenditures
Correct answer: Vacancy & Credit Loss
Vacancy & Credit Loss is subtracted from Potential Gross Revenue to arrive at Effective Gross Revenue, accounting for unleased space and uncollected rents.
Question 2: When analyzing a multi-tenant office property in Argus, 'Recovery Income' on the cash flow report typically refers to:
- Tenant improvement allowances reimbursed
- Tenant reimbursements for operating expenses (Correct answer)
- Security deposit interest income
- Percentage rent above base thresholds
Correct answer: Tenant reimbursements for operating expenses
Recovery Income represents tenant reimbursements for operating expenses such as CAM, insurance, and taxes under gross-up or NNN lease structures.
Question 3: A retail property cash flow model shows 'Percentage Rent' as a separate line. This income is triggered when:
- The lease term exceeds 10 years
- Tenant sales exceed a specified natural breakpoint (Correct answer)
- The base rent increases by more than CPI
- Occupancy falls below 90%
Correct answer: Tenant sales exceed a specified natural breakpoint
Percentage rent kicks in once tenant sales surpass the natural breakpoint, calculated as base rent divided by the percentage rent rate.
Question 4: In Argus, the 'Gross-Up' feature for operating expense recoveries is used to:
- Inflate expenses for conservative underwriting
- Normalize expenses to a fully occupied level for proration purposes (Correct answer)
- Add a management fee on top of base operating costs
- Convert NNN leases to gross lease equivalents
Correct answer: Normalize expenses to a fully occupied level for proration purposes
Gross-up normalizes variable operating expenses to a 100% occupancy basis so each tenant pays a fair pro-rata share regardless of actual occupancy.
Question 5: Which of the following best describes 'Above-Grade Cash Flow' in the context of a leveraged Argus model?
- NOI before deducting capital reserves
- Cash flow after debt service but before taxes (Correct answer)
- Gross revenue above the ground floor level
- Revenue generated only from above-market leases
Correct answer: Cash flow after debt service but before taxes
Above-Grade Cash Flow (also called Cash Flow Before Tax or Equity Cash Flow) is the income remaining after all operating expenses and debt service obligations are paid.
Question 6: A property's Argus cash flow shows a negative cash flow in Year 1 despite positive NOI. The most likely cause is:
- Excessive vacancy loss assumptions
- Debt service exceeding NOI (Correct answer)
- Under-projection of base rents
- High terminal capitalization rate
Correct answer: Debt service exceeding NOI
When debt service obligations exceed NOI, the leveraged cash flow turns negative even though the property itself operates profitably.
Question 7: In Argus Enterprise, 'Other Income' line items such as parking and antenna revenue are modeled using which input method?
- Lease abstracts with term expiration dates
- General vacancy and credit loss global inputs
- Non-rent revenue inputs with independent growth rates (Correct answer)
- Expense reimbursement recovery structures
Correct answer: Non-rent revenue inputs with independent growth rates
Non-rent income sources like parking and antenna fees are entered as separate revenue line items with their own amounts and growth rate assumptions independent of lease schedules.
ASC Cash Flow Analysis 2
In Argus Enterprise, which cash flow line item represents the difference between Potential Gross Revenue and Effective Gross Revenue?