California Real Estate Practice Exam

When computing the net income of an office building, an appraiser would consider, as a management expense, which of the following?

1. A tenant performing as manager in lieu of rental

2. All of the foregoing

3. Salary paid to a manager

4. The owner acting as his own manager

The correct answer is: A tenant performing as manager in lieu of rental

When computing the net income of an office building, it's important to consider expenses that directly relate to management, including the salary paid to a professional manager. This is considered a typical management expense because it represents a cost incurred to ensure the efficient operation of the property. The salary of a manager, whether they are a professional hired for the role or an owner actively managing the property, is a legitimate expense. If the owner is acting as their own manager, there's an implicit value in their time spent managing the property, but traditionally, expenses accounted for management should reflect what a third-party manager would cost. The option that refers to a tenant performing as a manager in lieu of rental also recognizes a compensatory arrangement, relevant in understanding management costs, but it does not accurately encapsulate the defined management expense typical in appraising properties. By considering the salary paid to a manager specifically, this aligns with standard appraisal practices that seek to quantify expenses as they would be incurred in the open market. Therefore, the context and definitions around management expenses support that the salary paid to a manager is essential in computing the net income of the building accurately.