Deck 8: Valuation Using the Income Approach

Question 1

Which of the following measures is considered the fundamental determinate of market value for income-producing properties?

A)Net operating income
B)Potential gross income
C)Operating expenses
D)Capital expenditures

Answer 1

A

Question 2

When using discounted cash flow analysis for valuation,the appraiser must estimate the sale price at the end of the expected holding period.This price is referred to as the property's:

A)net sale proceeds
B)selling expenses
C)terminal value
D)current market value

Answer 2

C

Question 3

Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents.Therefore,it is frequently argued that an income multiplier approach to valuation is most appropriate for which of the following property types?

A)Apartments
B)Office
C)Industrial
D)Retail

Answer 3

A

Question 4

Net operating income is similar to which of the following measures of cash flow in corporate finance?

A)Dividend yield
B)Earnings before deductions for interest,depreciation,income taxes,and amortization (EBIDTA)
C)Price-earnings ratio
D)Discount rate

Question 5

Given the following information,calculate the effective gross income multiplier.Sale price: $950,000,Potential Gross Income: $250,000,Vacancy and Collection Losses: 15%,and Miscellaneous Income: $50,000.

A)0.36
B)0.30
C)2.8
D)3.3

Question 6

Given the following information,calculate the effective gross income.Property: 4 office units,Contract rents per unit: $2500 per month,Vacancy and collection losses: 15%,Operating Expenses: $42,000,Capital Expenditures: 10%

A)$100,000
B)$102,000
C)$120,000
D)$135,000

Question 7

One complication that appraisers may face is the variety of lease types that may be available for a particular property type.Which of the following statements best describes a "graduated" or step-up lease?

A)The monthly rent remains fixed over the entire lease term.
B)The lease establishes schedule of rental rate increases over the term of the lease.
C)Rental rate increases are indexed to the general rate of inflation.
D)Rental rates are a function of the sales of the tenant's business.

Question 8

Given the following information,calculate the net operating income assuming below-line treatment.Property: 4 office units,Contract Rents per unit: $2500 per month,Vacancy and collection losses: 15%,Operating Expenses: $42,000,Capital Expenditures: 10%:

A)$48,000
B)$60,000
C)$95,000
D)$102,000

Question 9

In calculating net operating income,vacancy losses must be subtracted from the gross income collected.The normal range for vacancy and collection losses for apartment,office,and retail properties is:

A)between zero and one percent
B)between one and five percent
C)between five and fifteen percent
D)between fifteen and twenty percent

Question 10

The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no collection losses.This is commonly referred to as:

A)effective Gross Income
B)potential Gross Income
C)operating expenses
D)capital expenditures

Question 11

The process of converting periodic income into a value estimate is referred to as income capitalization.Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models.Which of the following statements best describes the direct capitalization method?

A)Value estimates are based on a multiple of expected first year net operating income.
B)Appraisers must make explicit forecasts of the property's net operating income for each year of the expected holding period.
C)Appraisers must select the appropriate yield at which to discount future cash flows.
D)The forecast must include the net income produced by a sale of the property at the end of the expected holding perioD.

Question 12

The going-in cap rate,or overall capitalization rate,is a measure of the relationship between a property's current income stream and its price or value.Which of the following statements regarding cap rates is true?

A)It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation)in the market value of the property.
B)It is a discount rate that can be applied to future cash flows.
C)It is analogous to the dividend yield on a common stock.
D)It is the main determinant of a property's value.

Question 13

The distinction between market rent and contract rent is important due to differences in lease terms.Office,retail,and industrial tenants most commonly occupy their space under leases that run:

A)one year or less
B)one to three years
C)three to five years
D)ten years or more

Question 14

Operating expenses can be divided into two categories: variable and fixed expenses.Which of the following best exemplifies a fixed expense?

A)Utilities
B)Property management
C)Property taxes
D)Trash removal

Question 15

Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?

A)Replacement of broken windows.
B)Landscape expense.
C)Pressure washing of walls.
D)Upgrade of insulation.

Question 16

For smaller income-producing properties,appraisers may use the ratio of a property's selling price to its effective gross income.This is an example of a:

A)Net operating income
B)Going-out cap rate
C)Going-in cap rate
D)Gross income multiplier

Question 17

Given the following information,calculate the overall capitalization rate.Sale price: $950,000,Potential Gross Income: $250,000,Vacancy and Collection Losses: $50,000,and Operating Expenses: $50,000.

A)15.8%
B)21.1%
C)26.3%
D)36.8%

Question 18

When using discounted cash flow analysis for valuation,an appraiser will prepare a cash flow forecast,often referred to as a:

A)restricted appraisal report
B)net operating income statement
C)direct market extraction
D)pro forma

Question 19

The expected costs to make replacements,alterations,or improvements to a building that materially prolong its life and increase its value is referred to as:

A)operating expenses
B)capital expenditures
C)vacancy losses
D)collection losses

Question 20

Most appraisers adhere to an "above-line" treatment of capital expenditures.This implies which of the following?

A)Capital expenditures are subtracted in the calculation of net operating income.
B)Capital expenditures are subtracted from net operating income to obtain a net cash flow measure.
C)Capital expenditures are added to net operating income.
D)Capital expenditures are excluded from all calculations because they are difficult to estimate.

Question 21

Given the following information,calculate the appropriate going-in cap rate using general constant-growth formula.Overall market discount rate = 12%,Constant growth rate projection: 3% per year,Sale price: $1,950,000,Net operating income: $390,000,Potential gross income: $520,000.

A)8%
B)9%
C)10%
D)11.5%

Question 22

Given the following information,calculate the appropriate going-in cap rate using mortgage-equity rate analysis.Mortgage financing = 75%,Typical debt financing cap rate: 10%,Sale price: $1,950,000,Net operating income: $390,000.

A)9.6%
B)10%
C)12.5%
D)13.6%