ASC Market Assumptions 3 — Questions and Answers
Question 1: In ARGUS Enterprise, a 'lease-up' scenario for a partially occupied building primarily relies on which market assumption to project future cash flows?
- Absorption period and market rent for new leases (Correct answer)
- Existing lease escalation schedule
- Reversion cap rate
- Loan-to-value ratio
Correct answer: Absorption period and market rent for new leases
Lease-up projections use absorption period and market rent assumptions to estimate when and at what rate vacant space will be leased.
Question 2: Which market assumption in ARGUS would an analyst adjust to reflect an expectation of softening demand and longer re-leasing periods?
- Increase months vacant (downtime) (Correct answer)
- Decrease market rent growth rate
- Increase renewal probability
- Decrease tenant improvement allowance
Correct answer: Increase months vacant (downtime)
Increasing months vacant reflects the expectation that it will take longer to find new tenants when market demand is soft.
Question 3: ARGUS allows analysts to set different market leasing assumptions for different tenant categories. What is the primary reason for this segmentation?
- Different tenant types have different lease structures, TI norms, and rent levels (Correct answer)
- It reduces the model's calculation time
- It automatically adjusts for inflation
- It prevents double-counting of expenses
Correct answer: Different tenant types have different lease structures, TI norms, and rent levels
Anchor tenants, in-line tenants, and office tenants each have distinct market norms for rent, TI allowances, and lease duration, requiring separate assumption sets.
Question 4: When modeling a multi-tenant office building, an analyst wants to reflect rising construction costs for tenant improvements. Which market assumption should be adjusted?
- Tenant improvement allowance per square foot (Correct answer)
- Base rent amount
- Vacancy rate
- Operating expense ratio
Correct answer: Tenant improvement allowance per square foot
The tenant improvement allowance per square foot is the market assumption that captures the cost of building out space for new tenants.
Question 5: An ARGUS model shows a tenant rolling to market rent upon lease renewal. If market rent is below the tenant's current in-place rent, what cash flow impact results?
- NOI decreases because renewal rent is lower than the expiring contract rent (Correct answer)
- NOI increases because the tenant stays
- Vacancy credit loss increases
- Operating expenses decrease proportionally
Correct answer: NOI decreases because renewal rent is lower than the expiring contract rent
If market rent is below in-place rent, the renewal at market rate causes a drop in rental income and therefore reduces NOI.
Question 6: In ARGUS, 'free rent' entered as a market leasing assumption affects cash flow by:
- Reducing rental income during the free rent period for new leases (Correct answer)
- Increasing operating expenses during the free period
- Deferring tenant improvement costs
- Extending the lease term automatically
Correct answer: Reducing rental income during the free rent period for new leases
Free rent reduces the rental income recognized during the concession period, directly lowering cash flow in those months.
Question 7: An analyst is modeling a suburban office park and sets a market rent growth assumption of -2% for year one followed by +4% thereafter. This approach is best described as:
- A phased market rent growth assumption reflecting near-term softness before recovery (Correct answer)
- A uniform growth assumption
- A step-rent structure
- A percentage rent structure
Correct answer: A phased market rent growth assumption reflecting near-term softness before recovery
Using a negative growth rate in year one followed by positive growth models a market correction then recovery, which is a phased or tiered growth assumption.
ASC Market Assumptions 3
In ARGUS Enterprise, a 'lease-up' scenario for a partially occupied building primarily relies on which market assumption to project future cash flows?