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

Question 1

$\begin{array}{rrr}\begin{array}{l}\\Price\\Effective ~gross ~income \\\% ~operating ~expense\\\mathrm{NOl}\\\end{array}\begin{array}{rrr}\text { Comp 1 } & \text { Comp 2 } & \text { Comp 3 } \\\hline \$ 300,000 & \$ 350,000 & \$ 375,000 \\50,000 & 55,000 & 60,000 \\50 \% & 55 \% & 54 \% \\25,000 & 30,000 & 32,500\end{array}\end{array}$

-Consider the table above. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a GIM approach yield rounded to the nearest $100)?

A) $322,600
B) $325,600
C) $328,600
D) $330,000

Answer 1

$328,600

Question 2

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

Answer 2

True

Question 3

The sales comparison approach to appraisal is preferred because it is the only objective appraisal approach.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

The rationale for using the cost approach to appraisal is that any informed buyer would not pay more for property that what it would cost to buy the land and build the structure.

Question 11

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

Question 12

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

Question 13

One advantage of the gross income multiplier approach to appraisal is that it is most suitable for properties in which operating expenses vary widely across the properties being surveyed.

Question 14

$\begin{array}{rrr}\begin{array}{l}\\Price\\Effective ~gross ~income \\\% ~operating ~expense\\\mathrm{NOl}\\\end{array}\begin{array}{rrr}\text { Comp 1 } & \text { Comp 2 } & \text { Comp 3 } \\\hline \$ 300,000 & \$ 350,000 & \$ 375,000 \\50,000 & 55,000 & 60,000 \\50 \% & 55 \% & 54 \% \\25,000 & 30,000 & 32,500\end{array}\end{array}$

-Consider the table above. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a cap rate approach yield rounded to the nearest $100)?

A) $322,600
B) $325,600
C) $328,600
D) $330,000

Question 15

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

Question 16

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 17

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.

Question 18

When using the gross income multiplier approach to appraisal, potential gross income is preferred to effective gross income.

Question 19

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

Question 20

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

Question 21

Which is of the following 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 22

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 23

Given the following sales adjustment grid, what adjustment would be made for size? $\begin{array}{cccc}\begin{array}{cc}\text { Characteristic } & \text { Subject } \\\text { Sales price } & \\\text { Square feet } & 1,800 \\\text { Exterior } & \text { Alum } \\\text { Age } & 16\end{array}\begin{array}{cccc}1&2&3&4\\116,000 & 120,000 & 124,000 & 126,000 \\1,700 & 1,900 & 1,900 & 1,900 \\\text { Brick } & \text { Alum } & \text { Alum } & \text { Brick } \\20 & 20 & 18 & 20\end{array}\end{array}$

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

Question 24

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%, the property value is estimated at:

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

Question 25

The discount rate is a rate that a typical investor would normally require as an) ___ return over investment holding period.

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

Question 26

Total possible income less any vacancy is ___.

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

Question 27

Which of the following statements regarding the sales comparison approach to appraisal is TRUE?

A) As a "rule of thumb" transactions involving foreclosures should be discounted by 10 percent
B) The comparable buildings' characteristics are more important that the comparable properties' location for performing the sales comparison
C) The comparable sales must involve transactions between unrelated individuals
D) The only factors important for comparable analysis are property size, building size, age of the building, and the condition of building

Question 28

$\begin{array}{rrr}\begin{array}{l}\\\text { NOI } \\\text { DS } \\\text { Cash flow } \\\text { Resale in year } 3 \\\text { Less mortgage balance } \\\text { Total cash flow } \\\text { Present value of cash flow @ } 15 \%\end{array}\begin{array}{rrr}\text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\$ 72,000 & \$ 74,880 & \$ 77,875 \\60,000 & 60,000 & 60,000 \\\hline \$ 12,000 & \$ 14,880 & \$ 17,875 \\& & 900,000 \\& & -435,000 \\\hline \$ 12,000 & \$ 14,880 & \$ 482,875 \\\$ 10,435 & \$ 11,251 & \$ 317,498\end{array}\end{array}$

-Consider the table above for a hypothetical income property that is under consideration for purchase with a $455,000 loan. Using the principles of mortgage equity capitalization, what is the estimated total property value rounded to the nearest $100)?

A) $317,500
B) $482,900
C) $772,500
D) $794,200

Question 29

Which of the following appraisal methods is NOT considered an income approach?

A) Capitalization rate
B) Discounted present value
C) Factor discounting rates
D) Gross income multiplier

Question 30

Consider a building with a very long economic life. Assume at the end of year 6, NOI will be $80,000 as is expected to grow at a rate of 2 percent per year. You company's required rate of return is 12 percent. As part of your analysis, you must calculate the reversion value REV) at the end of year 5, which would be:

A) $571,429
B) $666,667
C) $800,000
D) $4,000,000

Question 31

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

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

Question 32

Which of the following is TRUE concerning the capitalization rate?

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

Question 33

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 34

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 35

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 36

Regarding the value of a property, an appraisal:

A) Calculates value
B) Confirms value
C) Estimates value
D) Determines value

Question 37

$\begin{array}{rrr}\begin{array}{l}\\\text { NOI } \\\text { DS } \\\text { Cash flow } \\\text { Resale in year } 3 \\\text { Less mortgage balance } \\\text { Total cash flow } \\\text { Present value of cash flow @ } 15 \%\end{array}\begin{array}{rrr}\text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\$ 72,000 & \$ 74,880 & \$ 77,875 \\60,000 & 60,000 & 60,000 \\\hline \$ 12,000 & \$ 14,880 & \$ 17,875 \\& & 900,000 \\& & -435,000 \\\hline \$ 12,000 & \$ 14,880 & \$ 482,875 \\\$ 10,435 & \$ 11,251 & \$ 317,498\end{array}\end{array}$

-Using the information from the question above, what would be the equity dividend rate?

A) 2.4 percent
B) 3.5 percent
C) $12,000
D) $317,498
E) Not enough information

Question 38

Consider a property with NOI of $72,000 and a debt coverage ratio of 1.2 applied to first year NOI. What would be the estimated monthly mortgage payment?

A) $5,000
B) $7,200
C) $60,000
D) $86,400

Question 39

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 40

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 41

Which lease has the LOWEST effective rent? $$\begin{array} { l r r r r r } \text { Lease } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \\\hline \text { A } & 10 & 11 & 12 & 13 & 14 \\\mathrm {~B} & 0 & 13 & 14 & 15 & 16 \\\mathrm { C } & 0 & 0 & 20 & 20 & 22 \\\mathrm { D } & 15 & 14 & 13 & 12 & 11\end{array}$$

A) Lease A
B) Lease B
C) Lease C
D) Lease D