331- L2 Flashcards
Consider the following financial information for the current year if a small apartment building:
Purchase price: $500,000
Number of units: 25
Annual rent per unit: $5,900
Vacancy rate: 4%
Collection loss: 2%
Variable expenses per unit per year: $1,675
Fixed expenses per unit per year: $2,070
24 units were occupied last year
Based on your estimate of this years NOI and assuming no replacement allowance, what is the gross income multiplier and overall capitalization rate?
Gross potential rent ($5,900x25units)=$147,500
-vacancy and collection(6%) ($147,500x0.06) = $8,850
Gross effective income (147,500-8,850)
= 138,650
- fixed expenses (2,070x25)=51,750
-variable expenses(1,675x24)=40,200
NOI=(138,650-51,750-40,200)=46,700
GIM=Purchase Price/EGI
=500,000/138,650 = 3.61
OCR=NOI/purchase price
=46,700/500,000 = 9.34%
What is the main differences between transitional accounting income statements and the forecasted net operating income statements used by appraisers?
Major differences are due to:
1) items included in the calculation of NOI but not included in the income statement. The major items here would be the reserves for replacement. Reserves are not included in the income statement.
2) items excluded in the calculation of NOI but included in the income statement. The major items here would be depreciation expenses and interest on the debt.
3) accrued and prepaid expenses. The calculation of NOI assumes all revenues and expenses are paid when received or due. The Income Statement may be based on either the accrual method or cash method and the extension of such short term credit will cause differences to occur between the calculation of NOI and the net operating income on the income statement.
Which of the following statements is TRUE regarding reserves for replacement (or replacement allowance)?
(1) If the purpose of an income forecast is to determine expected cash flows, reserves for replacement are generally not included as an expense.
(2) In deriving a capitalization rate, the appraiser must know if reserves for replacement were accounted for in comparable properties, so that the subject property will be treated on a similar basis.
(3) Reserves for replacement are used in appraisal to account for capital expenditures, such as replacement of building fixtures.
(4) All of the statements above are true.
4- all are true
Replacement allowance is used in appraisal to account for capital expenditures, such as replacement of building fixtures. Whether or not it is applied in any particular situation is a matter of appraisal judgment based on market evidence. In deriving a capitalization rate, the appraiser must know if replacement allowance was accounted for in comparable properties, so that the subject property will be treated on a similar basis. If the purpose of an income forecast is to determine expected cash flows, replacement allowance is generally not included as an expense.
