Question 1

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?

Accepted Answer

The direct capitalization method involves estimating the value of a property by applying a capitalization rate to its net operating income. The capitalization rate is based on market data and reflects the relationship between the net operating income and the property value. The value estimate is calculated by dividing the expected first-year net operating income by the capitalization rate. No explicit forecasts of future net operating income or selection of a discount rate are required with this method.

Question 2

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

Accepted Answer

B

Question 3

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:

Accepted Answer

Office, retail, and industrial tenants typically lease their space for longer terms than one year or less, and usually longer than one to three years. These types of tenants often occupy space for extended periods and require stability in their rental costs, therefore a lease term of three to five years is common. This lease length allows for market rent to be reevaluated at set intervals, whereas a longer term lease, such as ten years or more, may not allow for rent adjustments to keep up with market changes. The distinction between market and contract rent becomes important in these longer-term leases, as the tenant may end up paying above or below market rent for an extended period of time.

Question 4

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:

Accepted Answer

Potential Gross Income (PGI) represents the total amount of rental income a property would produce assuming 100% occupancy and no collection losses. This is the starting point for calculating net operating income.

Question 5

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:

Accepted Answer

Vacancy and collection losses account for the potential income not received due to unoccupied units or uncollected rent. For apartment, office, and retail properties, a normal range for these losses is between five and fifteen percent, reflecting typical market conditions and property management effectiveness.

Question 6

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

Accepted Answer

The answer of Most appraisers adhere to an "above-line" treatment...

Question 7

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 (assuming selling expenses have yet to be accounted for)is referred to as the property's:

Accepted Answer

The property's sale price at the end of the expected holding period is referred to as the terminal value.

Question 8

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:

Accepted Answer

The ratio of a property's selling price to its effective gross income is known as the gross income multiplier. This method is commonly used for smaller income-producing properties where net operating income may not be readily available or applicable. The gross income multiplier is a quick and easy way to estimate property value based on the income it generates.

Question 9

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

Accepted Answer

Net operating income (NOI) is the fundamental determinant of market value for income-producing properties. NOI is calculated by subtracting operating expenses from the potential gross income. This number reflects the amount of income generated by the property after deducting operating expenses, but before deducting mortgage payments or taxes. It is used by appraisers and investors to estimate the market value of a property.

Question 10

When calculating the net operating income of a property,it is important to identify any expenses that will be incurred in attempts to maintain the property.All of the following would be considered operating expenses EXCEPT:

Accepted Answer

Mortgage payments are not considered operating expenses because they refer to the cost of financing the property, rather than the cost of maintaining or operating it. Operating expenses generally include property taxes, insurance premiums, utility expenses, maintenance costs, and property management fees.

Question 11

The cap rate is an important metric that investors use to analyze the state of commercial real estate markets.When interpreting cap rate movements,an increase in cap rates over time would indicate that:

Accepted Answer

An increase in cap rates over time would indicate that property values have decreased. This is because cap rates represent the rate of return an investor would expect to receive on a property given the current market conditions. If cap rates go up, it means that the market is demanding a higher rate of return to invest in commercial real estate, which in turn means that property values have likely decreased.

Question 12

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 properties with short-term leases.Which of the following property types,therefore,would we find it most appealing to use a gross-income multiplier in our analysis?

Accepted Answer

The gross-income multiplier approach is most appropriate for properties with short-term leases, and apartments typically have shorter lease terms than other property types. Therefore, apartments would be the most appealing choice to use a gross-income multiplier in our analysis.

Question 13

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?

Accepted Answer

A graduated or step-up lease is one where the lease establishes a schedule of rental rate increases over the term of the lease. This is in contrast to a fixed lease where the monthly rent remains the same over the entire lease term, an indexed lease where rental rate increases are indexed to the general rate of inflation, or a percentage lease where rental rates are a function of the sales of the tenant's business.

Question 14

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

Accepted Answer

Net operating income (NOI) is a measure of a company's income generated from its operations after deducting operating expenses. Similarly, Earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA) is a widely used measure of a company's cash flow generated from its operations. Both NOI and EBIDTA are used to analyze a company's operating performance and ability to generate cash flow.

Question 15

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:

Accepted Answer

Capital expenditures refer to the costs associated with making replacements, alterations or improvements to a building that materially prolong its life and increase its value. Operating expenses refer to the day-to-day costs of running a building such as utilities and maintenance. Vacancy losses refer to the financial losses incurred when a rental property remains unoccupied. Collection losses refer to losses incurred from tenants who do not pay rent.

Question 16

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

Accepted Answer

In discounted cash flow analysis, an appraiser will prepare a cash flow forecast which is commonly referred to as a pro forma. This statement will project anticipated cash inflows and outflows for the subject property over time and serves as the basis for determining its net present value. Option A (restricted appraisal report) is a type of appraisal report used for federally related transactions, option B (net operating income statement) is commonly used for income-producing properties but does not take into account cash flows beyond the operating expenses, and option C (direct market extraction) is a method of extracting a capitalization rate from sales data but does not involve creating a cash flow forecast. Therefore, none of these options provide a suitable answer.

Question 17

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

Accepted Answer

Capital expenditures are typically larger investments that provide long-term benefits, such as improvements to or replacement of fixed assets. Roof replacement, as it is a large investment in a fixed asset and provides long-term benefits, is more likely to be regarded as a capital expenditure. Property taxes, trash removal, and insurance payments are all operating expenses.

Question 18

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?

Accepted Answer

Cap rate can be compared to the dividend yield on a stock as it measures the expected income stream from an investment relative to the price or value of the investment. Cap rate does not include future cash flows or potential appreciation/depreciation in value. It is also not a discount rate that can be applied to future cash flows.

Question 19

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

Accepted Answer

Local property taxes are a fixed expense because they do not typically fluctuate based on changes in the level of business activity or sales.

Question 20

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.

Accepted Answer

The answer of Given the following information,calculate the overall capitalization...

Quiz 8: Valuation Using the Income Approach