Facilities Check List
Practical, step-by-step guides for the busy FM
April 2001
The Income Stream
For FMs who manage properties that generate income, an understanding of how investment real estate creates income iscritical.
Several sources of income are related to investment real estate. The following are sources that are common to allcategories of income-producing properties operated by lessors and property managers. The sum of these sources and othersources of potential income constitutes the income stream of a property. These categories are based on a standardChart of Accounts developed by the Building Owners and Managers Association.
Contract rent is the actual rent agreed upon under the terms of a lease. Do not confuse contract rent witheconomic rent, which is the current market rental rate. If the contract rent is lower than the economic rental rate, and the leasecontains no adjustment mechanism, the lessee has an advantage. Conversely, if the contract rate is higher than the market rate,the lessor has an advantage. Contract rent includes rent based on the area of tenant space, a “core” or “loss” factor, and, insome cases, common area maintenance charges.
Other rent provides an opportunity for the property manager to more fully use a facility by charging for certainservices such as vending machines, service income (for example, rooftop rentals for satellite antenna or concierge serviceincome), and parking revenue.
Many leases contain escalation clauses based on the Consumer Price Index (CPI), a monthly survey issued bythe U.S. Department of Labor. Published with both national averages and averages for certain regional centers, this index is anattempt to statistically report the effect of inflation on the purchasing power of a U.S. dollar. The CPI is one of the most widelycited statistics and is, therefore, an easily used benchmark by which a landlord may measure and adjust rental rates tocompensate for inflationary costs.
Additional rent results from lease provisions that allow increases of fixed expenses, such as taxes and insurance,to be allocated to the lessee on a prorated or other agreed-upon basis, as is often done in net leases.
Expense pass-through income is derived from lease provisions that allow operating (variable) expenses, typicallyabove a specified threshold, to be passed on to tenants on a prorated or agreed-upon basis. Expense pass-through clauses arevery effective if your tracking system is developed enough to account for the level of detail and control needed. The trackingsystem must be able to present the client with enough information to show how charges are assessed.
Shopping center income sources:
Some types of income are unique to shopping centers or mixed-usedproperties containing retail tenants. Many retail property leases have unique income sources that add significantly to the incomestream of such properties.This installment of FM Check List is adapted from BOMI Institute’s Real Estate Investment and Finance(www.bomi-edu.orgwww.bomi-edu.org), a course in BOMI Institute’s Real Property Administrator (RPA) and the FacilitiesManagement Administrator (FMA) programs.
