Deck 10: Valuation of Income Properties: Appraisal and the Market for Capital

Question 1

Which of the following is true concerning capitalization rates?

A) It is an IRR.
B) It explicitly considers projected future income and changes in property value over time
C) It expresses relationships between income and property value at a specific point in time
D) It is the rate of return that investors expect to earn on all capital invested

Answer 1

It expresses relationships between income and property value at a specific point in time

Question 2

In the cost approach to value,land value can be estimated by comparing sales of vacant land that are similar to the subject land.

Answer 2

True

Question 3

A building has 12 foot ceilings that cause the electric bill to be $1,200 higher per year.Depreciation caused by the ceilings can be estimated by calculating the present value of the $1,200 per year over the remaining economic life of building.

Answer 3

True

Question 4

A comparable property has a feature that is superior to the subject property.What adjustment would be made in the sales comparison approach to value?

A) Value of the feature would be subtracted from the sales price of the comparable property
B) Value of the feature would be added to the sales price of the comparable property
C) Value of the feature would be subtracted from the value of the subject property
D) Value of the feature would be added to the value of the subject property

Question 5

Which of the following steps normally would be used in the cost approach to value?

A) Estimate net operating income of the property
B) Multiply accrued depreciation by the assessed cost
C) Add actual construction costs to the land value
D) Subtract accrued depreciation from the replacement cost

Question 6

Which lease has the lowest effective rent?

A) A Above.
B) B Above.
C) C Above.
D) D Above.

Question 7

A property is sold for $200,000.Typical financing terms are an 85% loan with a 10% interest rate over 15 years.If the before-tax cash flow is $2,000,what is the overall capitalization rate?

A) 10.96%
B) 11.96%
C) 19.13%
D) 9.96%

Question 8

Total possible income less any vacancy is __________.

A) EGI
B) PGI
C) NOI
D) GIM

Question 9

Which of the following factors is NOT part of the definition of market value?

A) Payment is made in terms of cash in U.S.dollars or a comparable financial arrangement
B) The property has been on the open market for less than a year
C) Buyer and seller are typically motivated
D) Price is not affected by special or creative financing

Question 10

What does an appraisal tell about the value of a property?

A) An appraisal calculates value
B) An appraisal confirms value
C) An appraisal estimates value
D) An appraisal determines value

Question 11

Which of the following expenses would NOT be included in an operating statement used to calculated net operating income in the income approach to value?

A) Reserves for replacement
B) Maintenance
C) Real estate taxes
D) Capital additions

Question 12

The discount rate is a rate that a typical investor would normally require as a(n)__________ return over investment holding period.

A) Maximum
B) Risk free
C) Expected
D) Historical

Question 13

Capitalization rates will differ from yield rates when the income is expected to __________ over time.

A) Stay the same
B) Increase
C) Decrease
D) Both B and C

Question 14

A property is leased for $24,000 per year although market rents are currently $27,500 per year and are expected to increase by 2% per year.The property is expected to be sold at the end of year 10 based on a 10% terminal cap rate applied to the eleventh year NOI.The current lease on the property will expire at the end of year 10 so the property can be leased in the eleventh year at market rates.What is the value of the leased fee estate based on an 11.5% discount rate?

A) $362,489
B) $298,325
C) $251,298
D) $271,486

Question 15

Which of the following choices represents the main categories of depreciation?

A) Physical,external,functional
B) Physical,economic,locational
C) External,structural,financial
D) Economic,physical,external

Question 16

Economic obsolescence is the loss of value caused by inefficient layout of technological changes.

Question 17

When conducting an appraisal,only one of three approaches should be selected to determine the property value.

Question 18

Given the following sales adjustment grid,what adjustment would be made for size?

A) $20 psf.
B) $40 psf.
C) $50 psf.
D) $35 psf.

Question 19

A property produces a first-year net operating income of $24,000.Because of the long economic life of the building,the income is considered as a perpetuity that will grow by 2.5% per year.Using a discount rate of 9.5%,estimate that property value.

A) $276,968
B) $252,632
C) $200,000
D) $342,857

Question 20

Which is not normally considered when conducting an appraisal using the cost approach?

A) Functional obsolescence
B) Effective age
C) Capitalization rate
D) Replacement cost

Question 21

Return on investment and change in net operating income are essential factors for cost analysis.

Question 22

A gross income multiplier can be calculated by dividing the gross income by the sales price.

Question 23

The capitalization rate for a leased fee estate should always be lower than the capitalization rate for a fee simple estate.

Question 24

Capitalization rate of newly constructed apartment building will be more than that of relatively old apartment building,which is comparable in all other aspects.

Question 25

A property is purchased for $350,000.Based on an annual growth rate of 3%,the resale value at the end of year 10 would be $456,671.

Question 26

An overall capitalization rate can be calculated by dividing the net operating income by the property value.

Question 27

Appraisers use bracketing in order to estimate the upper and lower range of value.

Question 28

The market method or direct sales comparison method of estimating site value is not the most reliable method available.

Question 29

The capitalization rate is equal to the discount rate minus any expected annual growth in income and property value.

Question 30

The equity value can be estimated by subtracting debt service from net operating income and dividing this amount by the equity dividend rate.