Chapter 9

Question 1

Specific appraisal techniques applied to develop a value indication for a property based on its earning capability and calculated by the capitalization of property income.

Answer 1

Income Capitalization

Question 2

This approach converts income into a lump sum indication of a property value. This can be done in one of two ways:
the income can be divided by a rate; or
the income can be multiplied by a multiplier.

Answer 2

Income capitalization approach

Question 3

Value = Income / Rate
Value = Income X Multiplier

These are:

Answer 3

Income Capitalization formulas

Question 4

Let’s suppose we have a property that produces an income stream of $10,000. Let’s multiply that by 8. What do you get?

Now take that same $10,000 and divide it by 1/8 or .125. What do you get?

Answer 4

80,000 and 80,000

Take $10,000 and multiply by 10 and then divide $10,000 by 1/10 or .10. Pick any number. Multiply $10,000 by 6 or divide by 1/6. It always works out the same.

Question 5

When appraising small residential income properties, we typically use a

Answer 5

multiplier

Question 6

Most of the time, when utilizing multipliers we are using _________________ to arrive at an indication of value

Answer 6

Gross rent or income to

Question 7

Gross rent is usually expressed as a

Answer 7

monthly figure

Question 8

Gross income is an

Answer 8

annualized figure

Question 9

Gross income is simply the total of the ____________ plus any other income from the property operationg

Answer 9

rents for the whole year

Question 10

A ratio of one year’s net operating income provided by an asset to the value of the asset; used to convert income into value in the application of the income capitalization approach

Answer 10

Capitalization Rate

Question 11

The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization)

Answer 11

Net Operating Income (NOI)

Question 12

A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only one year’s income is used. Yield and value changes are implied but not explicitly identified.

Answer 12

Direct Capitalization

Question 13

What if the income was $48,543 and the appropriate capitalization rate was 12.4%?

Answer 13

You would need your calculator to ascertain that the indicated value was $391,476 ($48,543 /.124).

Question 14

The relationship between a single year’s net operating income expectancy and the total property price or value (RO = IO /VO)

Answer 14

Overall Capitalization Rate (Ro)

Question 15

An amount paid for the use of land, improvements or a capital good.

Answer 15

Rent

Question 16

The actual rental income specified in a lease

Answer 16

Contract Rent

Question 17

Income due under existing leases

Answer 17

Scheduled Rent

Question 18

The most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the lease agreement, including the rental adjustment and revaluation, permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements (TIs)

Answer 18

Market Rent

Question 19

Total base rent, or minimum rent stipulated in a lease, over the specified lease term minus rent concessions; the rent that is effectively paid by a tenant net of financial concessions provided by a landlord

Answer 19

Effective Rent

Question 20

The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord (lessor) and may reflect unusual management, unknowledgeable or unusually motivated parties, a lease execution in an earlier, stronger rental market, or an agreement of the parties.

Answer 20

Excess Rent

Question 21

The amount by which market rent exceeds contract rent at the time of the appraisal; created by a lease favorable to the tenant, resulting in a positive leasehold, and may reflect uninformed parties, special relationships, inferior management, a lease executed in a weaker rental market, or concessions agreed to by the parties.

Answer 21

Deficit Rent

Question 22

Rental income received in accordance with the terms of a percentage lease; typically derived from retail store and restaurant tenants and based on a certain percentage of their gross sales

Answer 22

Percentage Rent

Question 23

"A ratio of one year’s net operating income provided by an asset to the value of the asset" is the definition of
interest rate
mortgage rate
capitalization rate
prime rate

Answer 23

Capitalization Rent

Question 24

Converting an estimate of a single year's expected income into an indication of value is
yield approach
direct capitalization
cost approach
adjustment process

Answer 24

Direct Capitalization

Question 25

``` The formula for applying the income capitalization approach is value = rate / income value = income / rate value = income + rate value = rate - income + expenses ```

Answer 25

value = income / rate

Question 26

``` "The actual rental income specified in a lease" is the definition of overage rent contract rent market rent excess rent ```

Answer 26

Contract Rent

Question 27

The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses

Answer 27

Operating Expenses

Question 28

Expenses are divided into two categories

Answer 28

Fixed Expenses | Variable Expenses

Question 29

Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.

Answer 29

Fixed Expenses

Question 30

Operating expenses that generally vary with the level of occupancy or the extent of services provided

Answer 30

Variable Expenses

Question 31

This type of variable expense varies, depending on your market and usually is based on a percentage of the gross income.

Answer 31

Management Fee

Question 32

Consideration should be given to salaries paid to employees involved in the operation of the property.

Answer 32

Payroll

Question 33

The cost of updating interior decor and finishes should be considered.

Answer 33

Decorating

Question 34

Typically these are miscellaneous materials not covered by other categories.

Answer 34

Supplies

Question 35

This category applies to landlord expenses for upkeep of the property, both interior and exterior, and includes such items as roof repair, parking, sidewalk repair, window repair, electrical or plumbing repair, and maintenance of grounds or a swimming pool.

Answer 35

Maintenance

Question 36

This may often be the expense of the tenant, and leases should be reviewed to see to whom this expense applies. It may be a municipal service or a private service. In some commercial and industrial operations, this may be a significant expense - to get rid of cardboard and packing materials, excess raw materials used in production, or perhaps the need to dispose of hazardous waste materials.

Answer 36

Trash Removal

Question 37

This expense allows for the replacement of building components that may still have a remaining economic life, but will need replacement prior to the end of the remaining economic life of the building. You must determine the effective or actual age of a component and the estimated remaining life of the component

Answer 37

Replacement Allowance

Question 38

The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate

Answer 38

Total Operating Expenses

Question 39

Gross is what you _______with - Net is what is _____ ______!

Answer 39

start; left over

Question 40

The total income attributable to property at full occupancy before vacancy and operating expenses are deducted

Answer 40

Potential gross income

Question 41

All income generated in the operation of the property that is not derived directly from space rental. This could include income from vending machines, coin-operated washers and dryers, income from storage or parking spaces, etc.

Answer 41

Other Income

Question 42

"A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss

Answer 42

Vacancy and collection loss

Question 43

This type of income is a more important indicator than potential gross income

Answer 43

Effective gross income

Question 44

The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income

Answer 44

Effective Gross Income

Question 45

There is a difference between operating expenses and expenses used in accounting. Here are a few examples:

Answer 45

Income Taxes Depreciation Financing and debt service Capital Improvements

Question 46

To find net operating income, we perform the following steps:

Answer 46

Gross Annual Rental (Potential Gross Income, or PGI) ``` + Other Income - Vacancy/Credit Loss (V&C) = Effective Gross Income (EGI) - Operating Expenses (TOE) = Net Operating Income (NOI) ```

Question 47

A method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate, or 2) developing an overall rate that explicitly reflects the investment's income pattern, holding period, value change, and yield rate

Answer 47

Yield Capitalization

Question 48

The yield rate must provide for both the return __ and the return __ capital.

Answer 48

on; of

Question 49

The return __ investment will come from periodic cash flows that result from net income from rentals.

Answer 49

on

Question 50

The return __ the investment may come from the rents, other income, the reversion when the property is sold at the end of the holding period, or any combination thereof.

Answer 50

of

Question 51

With this method, you must draw specific conclusions about changes in net income, cash flow, and property value over the holding period. You must interpret market trends and investor expectations to come up with a market-oriented discount rate.

Answer 51

Yield capitalization

Question 52

``` Which of these would be considered an operating expense? financing costs management fee depreciation income taxes ```

Answer 52

Management Fee

Question 53

Which type of expenses do not vary with the occupancy of the property? variable expenses reserves for replacement fixed expenses

Answer 53

Fixed Expenses

Question 54

The primary difference between direct capitalization and yield capitalization is yield capitalization uses rates that are not extracted from the market direct capitalization uses one year's income; yield capitalization uses several years income yield capitalization is used for properties that are not primarily income-producing there is no difference; the terms are synonymous

Answer 54

direct capitalization uses one year's income; yield capitalization uses several years income

Question 55

``` Which of these would be a fixed expense? maintenance management fee property taxes utilities ```

Answer 55

Property taxes

Question 56

“The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted" is the definition of effective gross income net operating income potential gross income operating income

Answer 56

potential gross income

Question 57

All of the following are variable expenses, EXCEPT for payroll insurance utilities management

Answer 57

insurance

Question 58

A 32 unit apartment building has 12 units rented at $900 per month, 12 units rented at $1,100, and 8 units rented at $1,300 per month. What is its gross income? $14,400 $87,200 $412,800 $456,900

Answer 58

412,800

Question 59

``` _____________ rent is defined as ”the actual rental income specified in a lease.” Contract Market Effective Deficit ```

Answer 59

Contract

Question 60

``` Which term is defined as: "The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted"? Capital Effective gross income Net income Net operating income ```

Answer 60

Net Operating Income

Question 61

``` The basic formula for income capitalization states that value equals _______________ divided by a __________. gross income, rate income, multiplier rate, income income, rate ```

Answer 61

income,rate

Question 62

A 12 unit apartment building has 6 units rented at $900 per month and 6 units rented at $1,050 per month. What is its gross income? $1,950 $23,400 $86,500 $140,400

Answer 62

$140,400

Question 63

____________ expenses are “operating expenses that generally do not vary with occupancy.” Fixed Variable Unvarying Insurance

Answer 63

fixed