ASC Expense Modeling 2 — Questions and Answers
Question 1: In ARGUS Enterprise, what does 'grossing up' operating expenses mean when calculating tenant CAM reimbursements?
- Increasing stated expenses by a fixed 10% administrative fee
- Adjusting expenses to reflect what they would be at a specified occupancy level (e.g., 95%) so tenants pay a fair share even when the building is partially vacant (Correct answer)
- Adding capital expenditures into the CAM pool for reimbursement
- Rounding all expense figures up to the nearest thousand dollars
Correct answer: Adjusting expenses to reflect what they would be at a specified occupancy level (e.g., 95%) so tenants pay a fair share even when the building is partially vacant
Grossing up normalizes variable expenses to a hypothetical full-occupancy level so that no tenant benefits from or is penalized by building vacancies when computing reimbursable expenses.
Question 2: How are capital expenditure reserves (replacement reserves) typically modeled in ARGUS Enterprise?
- As a percentage of gross revenue added to operating expenses each year
- As a lump-sum entered only in the reversion year
- As an annual per-square-foot reserve entered in the CapEx or capital expenditure section, reducing cash flow below NOI (Correct answer)
- As part of debt service coverage calculations only
Correct answer: As an annual per-square-foot reserve entered in the CapEx or capital expenditure section, reducing cash flow below NOI
Replacement reserves are usually entered as a per-square-foot annual amount in the capital expenditures section, flowing through below NOI to reflect ongoing capital set-asides.
Question 3: What is an 'expense pool' in ARGUS Enterprise, and what is its primary purpose?
- A summary table of all debt-related expenses for a portfolio
- A grouping of specific expense line items that are allocated to tenants for reimbursement purposes, allowing precise control over which costs are recoverable (Correct answer)
- A reserve account funded by tenant security deposits
- An automated blending of market and in-place expenses
Correct answer: A grouping of specific expense line items that are allocated to tenants for reimbursement purposes, allowing precise control over which costs are recoverable
An expense pool lets analysts bundle designated expense lines together and assign them to tenant leases for CAM recovery, giving control over exactly which costs flow to which tenants.
Question 4: In ARGUS Enterprise, how does the software calculate a tenant's CAM reimbursement using the pro rata share method?
- By dividing the tenant's leased square footage by total building square footage and multiplying by the recoverable expense pool total (Correct answer)
- By averaging the per-square-foot costs across all occupied suites equally
- By using the tenant's revenue as a percentage of property gross income
- By applying a fixed CAM rate established at lease signing regardless of actual costs
Correct answer: By dividing the tenant's leased square footage by total building square footage and multiplying by the recoverable expense pool total
Pro rata share reimbursement divides the tenant's leased area by the total rentable building area and multiplies that fraction by the total recoverable expenses, giving each tenant their proportional share.
Question 5: When modeling real estate taxes in ARGUS Enterprise, which approach most accurately reflects the risk of a reassessment upon sale?
- Holding taxes flat at the current assessed value for the entire hold period
- Modeling taxes to step up in the year following a sale event based on the projected sale price and local assessment ratio (Correct answer)
- Excluding taxes from the model because they are always passed through to tenants
- Using a single blended tax rate applied to effective gross income
Correct answer: Modeling taxes to step up in the year following a sale event based on the projected sale price and local assessment ratio
A sale can trigger a reassessment, so sophisticated ARGUS models include a tax step-up in year one of a new ownership period based on expected sale price and local mill rates.
Question 6: What is the difference between 'controllable' and 'non-controllable' expenses in ARGUS Enterprise expense reimbursement modeling?
- Controllable expenses are fixed by lease; non-controllable change with inflation only
- Controllable expenses (e.g., management, maintenance) can be capped by lease provisions; non-controllable expenses (e.g., taxes, insurance) are typically excluded from tenant caps (Correct answer)
- Non-controllable expenses are entered manually; controllable expenses are auto-calculated
- Controllable expenses reduce NOI; non-controllable expenses do not affect NOI
Correct answer: Controllable expenses (e.g., management, maintenance) can be capped by lease provisions; non-controllable expenses (e.g., taxes, insurance) are typically excluded from tenant caps
Many leases cap annual increases on controllable CAM items (items within management's control) while allowing non-controllable items like real estate taxes and insurance to pass through without a cap.
Question 7: In ARGUS Enterprise, what impact does a high vacancy assumption have on expense recoveries in a building with NNN leases?
- Higher vacancy increases total expense recoveries because more space requires maintenance
- Higher vacancy reduces total expense recoveries because vacant space does not generate tenant reimbursements, leaving the landlord to absorb those costs (Correct answer)
- Vacancy has no effect on expense recoveries under NNN leases
- Higher vacancy automatically triggers a gross-up that keeps recoveries constant
Correct answer: Higher vacancy reduces total expense recoveries because vacant space does not generate tenant reimbursements, leaving the landlord to absorb those costs
Under NNN leases, only occupied tenants pay their pro rata share of expenses; vacant space has no reimbursing tenant, so the landlord must absorb the expense shortfall from those vacant units.
ASC Expense Modeling 2
In ARGUS Enterprise, what does 'grossing up' operating expenses mean when calculating tenant CAM reimbursements?