Certified Residential Appraiser Practice Exam

What is the essential characteristic of an index lease?

1. Short-term lease with fixed payments

2. Lease adjustments based on an economic index

3. A lease contingent on property value changes

4. Lease where the tenant covers all expenses

The correct answer is: Lease adjustments based on an economic index

An index lease is primarily defined by its mechanism for rent adjustments, which are tied to fluctuations in an economic index, such as the Consumer Price Index (CPI). This means that as the index rises or falls, the rent amount is adjusted accordingly, allowing it to keep pace with inflation or cost-of-living changes. This characteristic protects both the landlord and tenant; landlords ensure that rent maintains its value over time, while tenants can benefit from potential stabilizations in costs during periods of economic downturn. Options involving short-term leases with fixed payments, contingent leases based on property value changes, or leases where tenants cover all expenses do not capture the essence of what makes an index lease unique. The defining feature is the direct link between rent adjustments and an economic index, rather than the structure or duration of the lease or the financial responsibilities of the tenant.