Assignment 18 Flashcards
An appraiser is using the income approach to determine the market value of income-producing properties. Which of the following
items should be included in the calculation of net operating income?
A. An allowance for vacancy
B. An allowance for the leasing inducement paid at the onset of the lease
C. An allowance for the replacement of items such as the appliances in the suites
D. All taxes, including real property and income tax
- A, B, C, and D
- A, C, and D only
- A and C only
- A and D only
Correct Answer: 3
Calculation of net operating income (NOI) includes vacancy and debt allowance and, ongoing operating expenses. These include
real property taxes, fuel, electricity, maintenance and repairs, replacement reserves, water, wages, management costs, insurance
policies and some miscellaneous expenses. A leasing inducement, much like sales commission is not an ongoing operating
expense, rather it is a one-time payment and deducted from the estimate of market value. The items omitted when calculating
NOI are depreciation, income tax, capital cost allowance and debt service.
Consider the following statements regarding the income approach. Which of the statements are TRUE?
A. The cost of repairs considered a one-time payment and immediately required at the time of appraisal, should be deducted
as a lump sum from the property’s final value.
B. Items specific to an owner or investor are omitted in the calculation of net operating income.
C. The income approach cannot be applied to an owner-occupied commercial building.
D. Direct capitalization is the only technique used in the income approach of appraisal.
- A and D only
- B and C only
- C and D only
- A and B only
Correct Answer: 4
Statement A is true; an immediate repair is not considered an ongoing operating expense and so the amount is deducted from the
calculated market value to arrive at the final estimate of value as at the effective date of appraisal.
Statement B is true; many
items are specific to the owner and should therefore not be used in the calculation of NOI, such items include: depreciation,
income tax, and debt service.
Statement C is false; the income approach focuses on “market” rental income and so whether or
not it is inhabited by its owner makes no difference in principle in applying this method.
Statement D is false; both the direct
capitalization and discounted cash flow techniques can be used in the income method of appraisal
Which of the following statements is/are FALSE?
A. The conversion from net operating income to a capital amount is referred to as the capitalization process.
B. A gross lease is where the tenant pays a base rent, all operating expenses, and structural maintenance and repairs.
C. Net operating income is a return on the equity portion of the property’s value.
D. The economic life of a building depends on its economic durability, not its physical durability.
- A and D only
- A and B only
- B and C only
- C and D only
Correct Answer: 3
Statement B is false; a gross lease is where the landlord pays all the operating costs and structural repairs and maintenance. The tenant is charged a base rent plus a contribution to these expenses, with this gross rent remaining constant during the term of the lease.
Statement C is false; the net operating income is not a return on the equity portion of the property’s value, it is a return on the entire value of the property.
A group of investors are presented with the opportunity to invest in a class B office tower. In their review of the financial statements, they note that the depreciation expense for the building is $22,000 and that the capital cost allowance for the same year is $33,000. They are not sure which value to use in the calculation for the net operating income. Which of the following is
correct?
- Use the capital cost allowance since it provides a higher deductible.
- Use capital cost allowance as it conforms to Canada Revenue Agency’s standards.
- Use the depreciation expense as it is the actual expense incurred.
- Neither value is included in the calculation of net operating income.
Correct Answer: 4
Depreciation, capital cost allowance, income tax, and financing costs are specific to the individual owner, and are omitted from NOI calculations.
Which of the following statements regarding “escalator clauses” in property management is TRUE?
- An escalator clause allows the landlord to avoid giving notice of rent increases and is found only in residential
tenancies. - An escalator clause allows the landlord to recover expenses from the tenant should expenses increase, and is generally found in industrial and commercial leases.
- An escalator clause assigns rental increases based on comparable increases and is found strictly in residential
tenancies. - An escalator clause allows rent to increase along with inflation and is commonly found in all types of leases.
Correct Answer: 2
Escalator clauses are usually found in industrial and commercial leases. An escalator clause gives the landlord the ability to recover any increases in operating expenses from the tenant
