Property Valuation
What is a 'gross lease' versus a 'net lease' and how do they affect income property appraisal in Pennsylvania?
AGross leases are used for large properties; net leases for small ones
BIn a gross lease, the landlord pays operating expenses; in a net lease, the tenant pays some or all operating expenses; this affects the NOI calculation and, consequently, the property's appraised value✓ Correct
CGross leases have higher rents; net leases have lower rents, so there is no difference in value
DGross leases apply to short-term tenants; net leases to long-term commercial tenants
Explanation
In a gross lease, the landlord pays all operating expenses (taxes, insurance, maintenance) from the rent collected. In net leases (single net, double net, triple net), the tenant assumes some or all operating expenses, so the base rent is lower.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Math Concepts
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