ASC Evaluation Details and Structure 3 — Questions and Answers
Question 1: How does a full-service (gross) lease differ from a triple-net (NNN) lease in ARGUS modeling?
- Gross leases require tenants to pay all operating expenses; NNN leases do not
- In a gross lease the landlord pays most operating expenses; in a NNN lease tenants pay taxes, insurance, and maintenance directly (Correct answer)
- ARGUS cannot model gross leases; only NNN structures are supported
- Both lease types produce identical NOI because expenses always cancel out
Correct answer: In a gross lease the landlord pays most operating expenses; in a NNN lease tenants pay taxes, insurance, and maintenance directly
Under a gross lease the landlord absorbs operating costs (up to any expense stop), while under a NNN structure tenants reimburse the landlord for taxes, insurance, and CAM costs separately.
Question 2: What is an 'expense stop' in the context of an ARGUS lease model?
- The maximum allowable annual increase in operating expenses
- A base amount of operating expenses the landlord pays; costs above that threshold are passed through to the tenant (Correct answer)
- A cap on the tenant's total liability for the entire lease term
- The date at which expense recovery calculations terminate
Correct answer: A base amount of operating expenses the landlord pays; costs above that threshold are passed through to the tenant
An expense stop is a per-square-foot threshold below which the landlord absorbs expenses; any operating costs exceeding the stop are recovered from the tenant.
Question 3: In ARGUS, tenant improvement (TI) allowances are classified as:
- Operating expenses that reduce NOI each year of the lease
- Capital leasing costs that appear as cash outflows in the period the lease commences (Correct answer)
- Income offsets that reduce gross potential rent
- Loan proceeds credited against the purchase price
Correct answer: Capital leasing costs that appear as cash outflows in the period the lease commences
TI allowances are leasing capital expenditures modeled as lump-sum cash outflows when a new or renewal lease begins, reducing free cash flow in that period.
Question 4: What does 'market leasing assumptions' in ARGUS define for vacant or expiring space?
- The legal rent control limits imposed by local municipalities
- The projected lease terms, market rent, renewal probability, TI, and downtime applied to space that is not yet committed under a signed lease (Correct answer)
- Only the square footage available for leasing in the current year
- The historical average rent collected from all existing tenants
Correct answer: The projected lease terms, market rent, renewal probability, TI, and downtime applied to space that is not yet committed under a signed lease
Market leasing assumptions tell ARGUS how to model unleased or re-leasing space by specifying hypothetical future lease terms, market rent levels, downtime between leases, and tenant improvement costs.
Question 5: In ARGUS, base rent escalations for existing leases can be modeled as:
- Fixed dollar increases only — percentage increases are not supported
- Fixed dollar steps, percentage steps, or CPI-indexed increases depending on the lease structure (Correct answer)
- A single lump-sum payment at lease expiration
- Escalations tied exclusively to the going-in cap rate
Correct answer: Fixed dollar steps, percentage steps, or CPI-indexed increases depending on the lease structure
ARGUS supports multiple rent escalation types including fixed-dollar bumps, percentage increases, and index-linked (e.g., CPI) adjustments to match actual lease provisions.
Question 6: Which metric in ARGUS represents gross potential rent minus vacancy and credit loss?
- Net Operating Income (NOI)
- Effective Gross Income (EGI) (Correct answer)
- Cash Flow Before Debt Service (CFBDS)
- Total Recoverable Income
Correct answer: Effective Gross Income (EGI)
Effective Gross Income equals Gross Potential Rent minus vacancy allowance and credit loss, representing the income actually expected to be collected from tenants.
Question 7: How does ARGUS treat leasing commissions in the evaluation cash flow model?
- As an annual overhead expense spread evenly across all years
- As a leasing capital cost paid when a lease is signed or commences, similar to TI allowances (Correct answer)
- As a deduction directly from gross potential rent each year
- Leasing commissions are excluded from ARGUS models by default
Correct answer: As a leasing capital cost paid when a lease is signed or commences, similar to TI allowances
Leasing commissions, like TI allowances, are modeled as leasing capital expenditures that reduce cash flow in the year a new or renewal lease is executed.
ASC Evaluation Details and Structure 3
How does a full-service (gross) lease differ from a triple-net (NNN) lease in ARGUS modeling?