Private Real Estate CFAI EOC Reading 38, Q1 understand, following, regarding

Sunshine4ever

In Q1 of CFAI EOC in Reading 38 Private Real Estate investments, it asks “which of the following is least likely accurate regarding Property #2”
The correct answer is B, which i understand. But if you read the answer key, it also says operating expenses are indeed borne by the tenant, which make answer choice A look right too, ie statement A’s statement is false as well.
So why is the answer just B then?

pogo

Forgot a key word in my first post (bolded below):
Choice A is not right - it’s a net lease, so expenses are passed on to the tenant.
Choice A says, “Operating expense risk is borne by the owner.” Explanation in the solution says, “”The data in Exhibit 1 suggest that the operating expenses are passed on to the tenant,” implying the utilities expense risk is passed on to the tenant.
However, remaining operating expenses ($2.1M) are still borne by the owner. So A is a correct statement, making it the wrong choice.
Choice C is a correct statement as well - without even looking at the numbers, if you go back to the description of retail leases, you’ll find that the lease structure is tied to the percentage of sales. So is also not the proper choice.
B is a false statement because (again, read the description for retail leases) largest tenants in retail leases are locked in for 7-10 years.
Hope this helps. And I do think the question is obscure… not sure how reflective this is of the real exam, but I hope the exam is clearer.

tarik64

I don’t follow your logic here I’m afraid.
The answer key for sattement A says that: “Operating expenses are being passed on to to the tenant because the sum of Property Mgmt fees and other opreating expenses equal the expense reimbursement revenue” - so how exactly do you get a remaing $2.1m worth of operating expense risk that is borne by the owner for property 2?
I also don’t see how statement C can be a correct statement. Even the answer key says that “Other income is only $15k suggesting that there is minimal amount of percentage rent linked to sales revenues”. Option C in the question says “There is a significant amount of percentage rent linked to sales levels”. Surely this is least accurate?
I would agree with lagstream that all 3 seem wrong at first glance.

LokiDog2

Reagrding choice A: Refer the table on page 65. Row five from the top shows “Expense Reimbursement” of $330k. Compare this to “Other Operating Expenses” in the second-last row: $2.1M. Based on the difference, it should be evident that the owner is on the hook for a majority of the expenses (~85%).
Regarding choice C: Here’s how I interpreted this. The answer says, “There is a significant amount of percentage rent linked to sales levels.” So think of a number line from 1 to 1000. Let’s say the sales level (the natural breakpoint) is set to 900. To me, a significant amount of rent income is generated up to that level, 900. So the statement “sounds” correct. Now take the solution explanation - “there is a minimal amount of percentage rent linked to sales thresholds.” I think here they’re talking about rent generated above the 900 threshold. Note that I’m not disagreeing with you guys completely - I still think this is obscure.
As I said earlier, the question is arcane. I wouldn’t worry too much about it… if you absolutely must, open an inquiry with the CFAI. They’re pretty good at responding to these things. At least as far as the real exam goes, we’ll have questions that have been scrutized by multiple teams, so chances of similar crap showing up are minimal.