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

Accepted Answer

Net operating income (NOI) is considered the fundamental determinate of market value for income-producing properties because it represents the income stream that is available to pay for the property's mortgage, taxes, insurance, and other expenses, as well as provide a return on investment for the property owner. Potential gross income (PGI) is important in estimating the total income a property could generate, but it does not take into account vacancy and collection losses. Operating expenses and capital expenditures are subtracted from the NOI to arrive at the property's cash flow.

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

Accepted Answer

The sale price at the end of the expected holding period is known as the terminal value. This value represents the estimated future value of the property and is used in discounted cash flow analysis to determine the present value of expected future cash flows. The net sale proceeds (A) and selling expenses (B) are both factors that are taken into account when determining the terminal value, but they are not the same as the terminal value itself. The current market value (D) represents the value of the property as of the appraisal date, whereas the terminal value is a projection of the property's future value.

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

Accepted Answer

Gross income multiplier analysis is most appropriate for property types that generate rental income, such as apartments. This approach assumes that the subject and comparable properties are collecting market rents, which is typically true for apartments. The approach may not be as appropriate for office, industrial, or retail properties, which may have different income streams or rental structures.

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

Accepted Answer

Net operating income (NOI) is a measure of a company's profitability before deducting interest and taxes. Similarly, earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA) is a measure of a company's profitability that also excludes certain expenses. Both measures are used to evaluate a company's operating performance and cash flow. Dividend yield, price-earnings ratio, and discount rate are not measures of cash flow, but rather measures of a company's value or cost of capital.

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

Accepted Answer

Effective Gross Income (EGI) = Potential Gross Income - Vacancy and Collection Losses + Miscellaneous Income
EGI = $250,000 - ($250,000 x 15%) + $50,000
EGI = $250,000 - $37,500 + $50,000
EGI = $262,500

Effective Gross Income Multiplier (EGIM) = Sale Price / EGI
EGIM = $950,000 / $262,500
EGIM = 3.62

Therefore, the closest option to the calculated value is C) 2.8.

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

Accepted Answer

Contract rent per unit = $2,500/month
Total potential gross income = (4 units) x ($2,500/month) x (12 months/year) = $120,000/year
Vacancy and collection losses = 15% x $120,000 = $18,000/year
Effective gross income = $120,000 - $18,000 - $42,000 - 10% x $120,000 = $102,000. Therefore, the answer is B.

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.

Accepted Answer

A graduated or step-up lease establishes a schedule of rental rate increases over the term of the lease, typically based on predetermined intervals or benchmarks. This allows for incremental rental rate increases as the tenant's business grows or inflationary pressures impact the market.

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

Accepted Answer

The answer of Given the following information,calculate the net operating...

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

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 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

Accepted Answer

Potential Gross Income is the total annual income a property would produce assuming 100 percent occupancy and no collection losses. This figure is used as the starting point in calculating Net Operating Income.

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.

Accepted Answer

In the direct capitalization method, the value estimate is based on a multiple (capitalization rate) of the expected first year net operating income. This method is commonly used for properties with stable and predictable income streams, where the expected income in the first year is a good indicator of the property's overall income potential. In contrast, the discounted cash flow method requires explicit forecasts of net operating income for each year of the expected holding period and the selection of an appropriate discount rate. The forecast does not need to 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.

Accepted Answer

The statement that is true is C- it is analogous to the dividend yield on a common stock. Cap rate is a measure of a property's income in relation to its value and is often used as a way to compare different investment opportunities. It is not a measure of total return (A) as it only takes into account the current income stream, not future cash flows or expected appreciation. It is not a discount rate (B) as it does not take into account future cash flows. While it is often used in the determination of a property's value (D), it is not the only determinant.

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

Accepted Answer

Office, retail, and industrial tenants typically occupy their space under leases that run for three to five years. This makes option C the best choice. The distinction between market rent and contract rent is important because market rent refers to the prevailing rental rate in the market, while contract rent is the rent agreed upon by the landlord and tenant in the lease contract. Understanding these terms is essential in negotiating lease terms and determining fair market value.

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

Accepted Answer

Property taxes are a fixed expense as they typically do not vary based on the company's level of production or sales.

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.

Accepted Answer

Upgrading insulation is a significant improvement to the structure of a building that would provide long-term benefits. It is considered a capital expenditure that increases the value of the asset and is depreciated over time. The other options (replacement of broken windows, landscape expense, pressure washing of walls) are typically considered operating expenses as they are routine repairs and maintenance to keep the property in good condition.

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

Accepted Answer

The ratio of a property's selling price to its effective gross income is known as the gross income multiplier (GIM). This is a commonly used method for appraising smaller income-producing properties such as rental homes, duplexes, or small apartment buildings. GIM is calculated by dividing the property's selling price by its effective gross income (annual rental income minus vacancies and expenses). The resulting number can then be compared to the GIMs of similar properties in the area to determine if the property is priced competitively.

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%

Accepted Answer

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

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

Accepted Answer

When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, which is often referred to as a pro forma. The pro forma is a financial statement that projects future cash flows, allowing for the calculation of the present value of those cash flows.

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

Accepted Answer

Capital expenditures are investments made to enhance the value or extend the life of an asset or property. Replacements, alterations, or improvements to a building that materially prolong its life and increase its value are considered capital expenditures. Operating expenses refer to the costs associated with day-to-day operations or maintenance, while vacancy losses refer to lost income due to vacancies or unoccupied units. Collection losses refer to the unpaid rent or bad debts.

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.

Accepted Answer

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

Quiz 8: Valuation Using the Income Approach

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

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:

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?

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

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.

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%

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?

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%:

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:

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:

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?

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:

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

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

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:

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.

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

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:

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