In this post, I want to discuss the three terms that relate to the income of a property.

### 1.) Gross Income

By definition, Gross Income is the total amount of income that could be generated by the rents of your property over the course of a year, assuming that the property is fully occupied. The terms Gross Rental Income or Gross Scheduled Income may also be used instead of the term Gross Income. Regardless of the term used, you need to know the maximum amount of income that can be generated by the rents of a property before vacancies and credit losses.

For Example, you are looking at a 10 unit Apartment building that are all 2 bedroom units. From your research, you gather that 2 bedroom units in this part of town are renting for \$1000 a month.

Therefore, the numbers would look like this:

2 bedroom units at \$1000 a month X 10 units = \$10,000 a month in rental income

Monthly rental income of \$10,000 X 12 months = \$120,000

From this example, your Gross Income or (Gross Rental Income or Gross Scheduled Income) would be \$120,000, because this is the Maximum amount of income that you can receive from the rents generated by the property.

Once you have determined the Gross Income, now you need to account for the vacancies within the property.

### 2.) Vacancy Rate

The vacancy rate is the percentage of all the rental units that are vacant in relation to the total amount of units in the property.

The formula for Vacancy rate is the total vacant units ÷ the number of total units

For example, using the same property information above, the total number of units would be 10, because their are 10 units in the apartment building. If two units are vacant, then the vacancy rate would be 20%.

Formula: 2 (total vacant units) ÷ 10 (the number of total units) = .2 or 20%

### 3.) Effective Gross Income (EGI)

Effective Gross Income, or EGI for short, serves as the baseline for which you will use in calculating the earning capacity of the property. This is the figure you will use to subtract operating expenses from, and consequently determining the Net Operating Income (NOI) of a property.

Effective Gross Income is calculated by taking the Gross Income and subtracting the vacancy and collection costs, plus adding any additional income that the property may generate outside of rental income, i.e. Laundry, Vending Machines, Parking, etc.

The formula for the Effective Gross Income is as follows:

Gross IncomeVacancy Costs (vacancy rate (%) x income = \$ amount) – Credit Loss (i.e. collections, evictions, etc) = Effective Gross Income (EGI)

For example, using the same property information above:

Gross Income: \$120,000

(minus)Vacancy Rate (20%): \$24,000

(minus) Credit Loss (2%): \$2400

(plus) Additional Miscellaneous Income (Laundry, Parking, etc.): \$3500

=Effective Gross Income (EGI): \$97,100

You need to understand how to calculate the effective gross income of a property as this will serve as your baseline for subtracting operating expenses and calculating the Net Operating Income of the property.

Rent Information

 Term Definition Absolute Net Lease requiring tenant to pay in addition to base rent all costs associatedwith the operation, repair and maintenance of the building, all real estate taxes, and utilities including repairing and maintenance of the building’s structure and . Often the tenant is directly responsible both for all such costs and for the active handling of the items themselves. It is distinguished from Triple Net (see below) by tenant’s responsibility for maintenance and repair of the building structure and roof. Additional Rent Any amounts due under a lease that are in addition to base rent. Most commonform is operating expense increases. Base Rent A specific amount used either as a minimum rent in a lease (retail) which uses apercentage of sales or overage for additional rent or sets a base onto which is added expenses and taxes in a net lease or increases in those items in a fully serviced lease. Base Year The 12 month period upon which a direct expense escalation of rent is based.Typically the calendar year the lease commences. Effective Rent The average per square foot rent paid by the tenant over the term of a lease.Takes into account only free rent and stepped rents. Does not include allowances, space pockets, free parking and other similar landlord concessions. Escalation A clause in a lease providing for an increased rental at a future time.May be accomplished by several types of clauses, such as: (1) fixed increases — a clause which calls for a definite, periodic rental increase; (2) cost of living — a clause which ties the rent to a government cost of living index, with periodic adjustments as the index changes; (3) direct expense — the rent adjusted according to changes in the expenses of the property paid by the lessor, such as tax increases, increased maintenance costs, etc. Free Rent A concession granted by a landlord to a tenant whereby the tenant is excusedfrom paying rent for a stated period during the lease term. Full Service Gross A lease in which the stated rent includes the operating expenses and taxes forthe building. Gross Lease A lease in which the stated rent includes the operating expenses of the building.Same as Fully Serviced Lease. Opposite of Net Lease. Modified Gross Landlord covers base year taxes and insurance, any increases over base year arepassed through to tenant. Net Today this generally indicates a lease in which the stated rent excludes theinsurance, utilities, operating expenses and real estate taxes for the building. The tenant is then responsible for payment of these costs either directly or as additional rent. Net Net (Double Net) Landlord pays for roof and structure and taxes. Net Net Net (Triple Net) A lease requiring the tenant to pay in addition to a fixed rental, the expensesof the property leases, such as taxes, insurance, main tenancy, utilities, cleaning, etc. Rent Consideration paid for the occupancy and use of real property. Also a generalterm covering any consideration (not only money). Rental Rate The amount of Rent paid for the occupancy and use of real property.Typically stated on a per square foot per month or per year basis.

Building Classes

 Term Definition Class Class is usually used in conjunction with an office property and refers to the quality of property.Class definitions fall with the following guidelines: Class A+ Landmark quality, highrise building with prime central business district location (the best of theClass A buildings). Class A Generally 100,000 s.f. or larger (five or more floors), concrete or steel construction,built since 1980, business/support amenities, strong identifiable location/access. Class B Renovated and in good locations. Newer building, smaller in size,wood frame construction, and/or in non-prime location. Class C Older, unrenovated of any size in average to fair condition.
 Term Definition Attornment An agreement to become a tenant or recognize a new owner of a propertyand to pay rent to such new owner in place of the former owner. A tenant will often be asked to sign a SNDA (Subordination, Nondisturbance and Attornment Agreement) where tenant agrees to attorn to the landlord’s lender if the lender forecloses on the property. Breakpoint A breakpoint is gross sales figure that a retail tenant must reach before itmust begin paying percentage rent to a landlord. The “natural breakpoint” is the point where the base rent equals the percentage rent. This is generally calculated by dividing the base rent by the percentage. The breakpoint can be higher or lower than the natural breakpoint depending on what the parties negotiate. (See Percentage Rent.) Distraint for Rent A lease clause, based on the common law, permitting a Landlord to seize,without prior court approval, and eventually sell, a tenant’s property that is located on a leased property after a default. Such clauses are not permitted in many jurisdictions. Eviction (Unlawful Detainer) An expedited legal process by which an owner can recover possessionof real property from a tenant or other party by obtaining a court order called a “Writ of Restitution”. Exclusive Use A lease clause which limits the landlord’s right to lease space to anothertenant with a competing use. The scope of the “exclusive” and the remedies for breach are negotiated by the parties. Force Majeure A lease clause that protects the parties if they are prevented from performing their obligations by problems beyond their reasonable control. Novation The substitution of one party to a contract for another by agreement ofall the parties. A novation will discharge one of the parties and substitute a new party in its place. Percentage Rent A rental charge, usually in a retail lease, based upon a specifiedpercentage of tenant’s gross sales. (See Breakpoint.) Quiet Enjoyment A lease covenant where the landlord promises that the tenant will enjoythe possession and use of the premises in peace and without disturbance. Subrogation A substitution of one party in place of another with regard to a claim or right.Insurance companies, guarantors and bonding companies generally can step into the shoes of the party they are obligated to pay and sue any party that the original claimant could have sued.

Miscellaneous