REA Leasing & Property Operations 2 — Questions and Answers
Question 1: What is 'operating expense ratio' (OER) and how is it used in property analysis?
- Total operating expenses divided by effective gross income; measures operational efficiency (Correct answer)
- Net operating income divided by gross potential income; measures income capture rate
- Debt service divided by gross revenue; measures total leverage burden on income
- Capital expenditures divided by gross building area; measures reinvestment intensity
Correct answer: Total operating expenses divided by effective gross income; measures operational efficiency
OER (total operating expenses ÷ EGI) measures what percentage of collected income is consumed by operating expenses, with lower ratios indicating greater operational efficiency.
Question 2: What is 'economic occupancy' versus 'physical occupancy' in property management?
- Economic occupancy measures rent collected relative to potential rent; physical occupancy measures leased space relative to total space (Correct answer)
- Economic occupancy counts signed leases; physical occupancy counts tenants currently in possession
- Physical occupancy adjusts for seasonality while economic occupancy uses annual averages
- Economic occupancy excludes common areas; physical occupancy includes all leasable and common space
Correct answer: Economic occupancy measures rent collected relative to potential rent; physical occupancy measures leased space relative to total space
Physical occupancy is a space metric (% leased), while economic occupancy is an income metric (% of potential rent collected), accounting for free rent and delinquencies.
Question 3: What is a 'right of first offer' (ROFO) clause in a commercial lease?
- A tenant's right to receive the first offer from the landlord before adjacent space is leased to others (Correct answer)
- A tenant's right to purchase the building before the landlord markets it for sale
- The landlord's right to terminate the lease if a more creditworthy tenant is identified
- A clause requiring the tenant to give the landlord first right to match any sublease offer
Correct answer: A tenant's right to receive the first offer from the landlord before adjacent space is leased to others
A ROFO gives the tenant the right to receive and consider the landlord's offer for adjacent space before it is marketed to outside parties.
Question 4: What is a 'base year' expense stop in an office lease?
- The landlord pays operating expenses up to the base year amount; tenants pay increases above that level (Correct answer)
- A fixed cap on operating expense increases applied equally to all tenants in the building
- The first year of the lease term during which the tenant pays no operating expenses
- A clause allowing the landlord to reset expense allocations every five years
Correct answer: The landlord pays operating expenses up to the base year amount; tenants pay increases above that level
A base year stop sets the landlord's operating expense contribution at the actual expenses in a specified base year; tenants pay their pro-rata share of any annual increases above that baseline.
Question 5: What does 'net effective rent' measure in commercial leasing?
- The average annual rent after accounting for all concessions such as free rent and TI allowances (Correct answer)
- The rent per square foot excluding operating expense pass-throughs
- The rent received after deducting leasing commissions from gross rent
- The in-place rent compared to current market asking rents
Correct answer: The average annual rent after accounting for all concessions such as free rent and TI allowances
Net effective rent spreads the total lease value net of all concessions (free rent, TI, moving allowances) over the entire lease term to calculate true average annual rent.
Question 6: In multifamily property operations, what is 'economic vacancy loss'?
- Income lost due to physical vacancies, non-payment, and rent concessions combined (Correct answer)
- Only the income lost from physically unoccupied apartment units
- The difference between market rents and the actual rents charged to current tenants
- Vacancy caused by seasonality patterns in a specific geographic market
Correct answer: Income lost due to physical vacancies, non-payment, and rent concessions combined
Economic vacancy loss captures all income leakage including physical vacancy, bad debt, concessions, and model units — all factors that reduce actual income below gross potential.
REA Leasing & Property Operations 2
What is 'operating expense ratio' (OER) and how is it used in property analysis?