Definitions

Question 1

1st Step of Scientific Method:

1. Observation: This is a description of a group of phenomena. In appraisal____________

Answer 1

This step defines a problem to be solved and the research objectives. For example, the growth of the condominium housing market next to a college campus might be observed for a market analysis within an appraisal.

Question 2

2nd Step of Scientific Method:

2. Formulation: This theory explains the formulation of a hypothesis. In appraisal______________

Answer 2

The hypothesis within an appraisal is the purpose of the appraisal such as to estimate market value. To estimate value, a research plan is implemented to test supply and demand factors, which are characteristics of a real estate market. For example, a developer may believe converting an apartment building into condominiums is feasible. A plan is then created to verify feasibility.

Question 3

3rd Step of Scientific Method:

3. Prediction: The use of the theory predicts the existence of other phenomena, or to predict quantitatively the results of new observations. In appraisal____________

Answer 3

In an appraisal, this step is the implementation of a plan to collect and analyze data, which determines the approaches necessary. For example, a developer contracts an appraiser to perform an appraisal detailing the feasibility of the condominium conversion. This example, Step 3, executes the plan developed in Step 2.

Question 4

4 Steps of Scientific Method

Answer 4

1. Observation -Define the problem and research objectives
2. Formulation - Develop research plan
3. Prediction - Implement plan (collect and analyze data)
4. Analysis - Interpret & report results

Question 5

4th Step of Scientific Method:

4. Analysis: Experimental tests of the theories by several independent parties are conducted to ensure validity of the first three steps. In appraisal____________

Answer 5

Interpretation and reporting the results occur in an appraisal after testing various analyses (statistical, analogy, observation, etc). For example, the cash flows of the condominium conversion project might include a variety of parameters resulting in different analyses such as different development times, build-out, sales price per unit, unit sizes, or amenities. As a result, the appraiser and developer can project the feasibility based on the most likely circumstances.

Question 6

Absorption:

Answer 6

The total demand for a type of real estate offered on the open market by all economic agents within an economy or market that may be leased or sold during a certain period.

Question 7

Absorption:

Answer 7

Absorption: The total demand for a type of real estate offered on the open market by all economic agents within an economy or market that may be leased or sold during a certain period.

Question 8

Adjustments in the sales comparison approach should be made in this order:

Answer 8

property rights
financing terms
conditions of sale
market conditions
location
physical characteristics
economic characteristics

Question 9

Agents of production:

Answer 9

Traditionally considered land, labor, capital, and coordination (coordination is also sometimes called management or entrepreneurial profit).

Question 10

Agents of production:

Answer 10

Agents of production: Traditionally considered land, labor, capital, and coordination (coordination is also sometimes called management or entrepreneurial profit).

Question 11

AIRR

Answer 11

adjusted internal rate of return

Question 12

Amenities:

Answer 12

Any tangible or intangible benefits of a property, especially those which increase the attractiveness or value of the property or which contribute to its comfort or convenience. Tangible amenities might include parks, swimming pools, health club facilities, party rooms, bike paths, community centers, door attendants, or garages, for example. Intangible benefits might include a “pleasant view” or other aspect, low crime rates, or a “sun-lit living room”, which all add to the living comforts of the property.

Question 13

An arm’s length transaction:

Answer 13

An arm’s length transaction is a real estate contract where the purchaser and sellers of a real estate property are acting independently, without coercion, of their own self-interest, and are not related to one another.

Question 14

Analysis:

Answer 14

Analysis: Experimental tests of the theories by several independent parties are conducted to ensure validity of the first three steps of the scientific method (observation, formulation, prediction).

Question 15

Annuity.

Answer 15

A contract providing for regular payments of predictable amounts. Regular payments are those that occur at a constant periodic rate, such as monthly, quarterly, or annually. Predictable amounts include those that are level, that escalate based on the Consumer Price Index, that step up, or that can be predicted in any other way.

Question 16

Anticipation

Answer 16

Anticipation is the present worth of revenue or other benefits expected in the future. These future benefits are either quantitative or qualitative. While many influences affect purchasers and sellers in arriving at market value, the principle of anticipation is perhaps the most influential. Even though this principle is reflected in all three approaches to value (Sales Comparison, Cost, Income), it is considered the fundamental foundation of the Income Approach.

Question 17

Anticipation:

Answer 17

An economic theory where value is created by expectations of future benefits such as income, appreciation, tax benefits, etc.

Question 18

Anticipation:

Answer 18

Anticipation: An economic theory where value is created by expectations of future benefits such as income, appreciation, tax benefits, etc.

Question 19

Appraisal:

Answer 19

An opinion or estimate of value regarding real estate, as of a specified date, which is supported by documented data. The appraisal, or valuation process, is a sequence of steps used by the appraiser to derive a reasonable value estimate.

Question 20

Appraisal:

Answer 20

Appraisal: An opinion or estimate of value regarding real estate, as of a specified date, which is supported by documented data. The appraisal, or valuation process, is a sequence of steps used by the appraiser to derive a reasonable value estimate.

Question 21

Appraiser’s opinion:

Answer 21

Judgment supported by facts, logic, and reasonable analysis.

Question 22

Appraiser’s opinion:

Answer 22

Appraiser’s opinion: Judgment supported by facts, logic, and reasonable analysis.

Question 23

Appraisers can employ several techniques for extracting adjustments. Some of these include:

Answer 23

Paired sales technique
Rent analysis
Market survey
Cost analysis
Regression analysis

Question 24

APR

Answer 24

annual percentage rate

Question 25

ARM

Answer 25

adjustable rate mortgage

Question 26

ATCF

Answer 26

after tax cash flow

Question 27

ATIRR

Answer 27

after tax internal rate of return

Question 28

Attitudinal surveys:

Answer 28

Consumers are interviewed based on their opinions or attitudes for certain characteristics of a property to determine demand.

Question 29

Attitudinal surveys:

Answer 29

Attitudinal surveys: Consumers are interviewed based on their opinions or attitudes for certain characteristics of a property to determine demand.

Question 30

Automated valuation model (AVM):

Answer 30

Automated valuation model (AVM): A computer-generated program that utilizes information obtained from agents, brokers, appraisers, public records, and other sources to provide value estimates for properties.

Question 31

Balance

Answer 31

Balance is achieved when numerous factors exert proportional influence on value. This principle applies to several different factors, including the four agents of production: land, labor, capital, and coordination (entrepreneurial profit). For all types of real property, the highest value is achieved when these four agents of production are in balance or when these factors create the best return on the investment of the land. Example: Developer A constructs an office building, at a cost of $2 million, on a 4-acre rural site he purchased for $100,000. Developer B constructs a $1.2 million office building on a 2-acre site in a local office park, which he purchased for $900,000. Both developers have $2.1 million in their respective projects, however, it is more likely that, upon completion, Developer B's project will be worth more than Developer A's, because of the relative balance between the land and improvement values. Although the agents of production might be in balance, the most important combination is the land and the improvements. When combined, the improvements add the most value to the land when the property is utilized for its highest and best use.

Question 32

Balance:

Answer 32

An economic principle that is caused when numerous factors exert proportional influence on value. Favorable factors include the four agents of production: land, labor, capital, and coordination.

Question 33

Balance:

Answer 33

Balance: An economic principle that is caused when numerous factors exert proportional influence on value. Favorable factors include the four agents of production: land, labor, capital, and coordination.

Question 34

Band of investment

Answer 34

A technique in which the capitalization rates attributable to components of an investment are weighted and combined to derive a weighted-average rate attributable to the total investment (i.e., debt and equity, land and improvements).

Question 35

Before-tax cash flow (equity dividend):

Answer 35

Before-tax cash flow (equity dividend): Cash flow often used to evaluate the cash flow from an income-producing property by subtracting the debt service from the net operating income.

Question 36

Bottom-up approach:

Answer 36

Bottom-up approach: In business development, a bottom-up approach means that the adviser takes the needs and wishes of the would-be entrepreneur as the starting point, rather than a market opportunity (which would be a "top-down" approach).

Question 37

Break-even ratio (also known as default ratios):

Answer 37

Break-even ratio (also known as default ratios): A ratio that indicates the property's ability to generate sufficient income to pay for debt services.

Question 38

BTCF

Answer 38

before tax cash flow

Question 39

BTIRR

Answer 39

before tax internal rate of return

Question 40

Building residual technique

Answer 40

A capitalization technique in which the net operating income attributable to improvements is isolated and capitalized by the building capitalization rate (RB) to indicate the improvements’ contribution to the total property value. When the improvements’ value is added to the land value, a total property value estimate is produced.

Question 41

Built-up method.

Answer 41

A method of developing a discount rate or capitalization rate using the basic elements of risk.

Question 42

C

Answer 42

mortgage coefficient

Question 43

Capital recovery rate.

Answer 43

The return of investment capital, expressed as an annual rate; often applied in a physical sense to wasting assets with a finite economic life; used interchangeably with amortization rateto express investors’ desire to recover their equity investment over a specified time period; also called capital recapture rate.

Question 44

Capitalization rate (cap rate):

Answer 44

Capitalization rate (cap rate): The rate used for converting net income to an indication of value. The basic relationship of income to value is expressed by the formula V = I/R (value equals income divided by a rate) or V = I x F (value equals income multiplied by a factor).

Question 45

Capitalization:

Answer 45

Capitalization: Capitalization is a simple method of converting the net income generated by a property into an estimate of value by capitalizing at an appropriate rate.

Question 46

Cash equivalency analysis.

Answer 46

An analytical process in which the sale price of a transaction with nonmarket financing or financing with unusual conditions or incentives is converted into a price expressed in terms of cash or its equivalent.

Question 47

Cash flow analysis:

Answer 47

Cash flow analysis: An analysis of the periodic payments that accrue from an investment after all cash expenses, payments, and taxes have been deducted.

Question 48

Central Business District (CBD):

Answer 48

The center of an urban area, typically zoned for various uses such as retail, office, and residential. Further, in some areas, transportation starts and ends in the CBD since it is the central location for employment.

Question 49

Central Business District (CBD):

Answer 49

Central Business District (CBD): The center of an urban area, typically zoned for various uses such as retail, office, and residential. Further, in some areas, transportation starts and ends in the CBD since it is the central location for employment.

Question 50

Central Limit Theorem

Answer 50

Central Limit Theorem The central limit theorem states that the sampling distribution of the sample mean approaches a normal distribution as the size of the sample grows. This means that the histogram of the means of many samples should approach a bell-shaped curve generally speaking, the larger the sample size, the greater the reliability.

Question 51

Change

Answer 51

Change is inevitable, especially in real estate. For instance, new social patterns, technology, employment, transportation, and other factors create new demands for real estate. However, demographic changes create demand for different types of housing and other commercial real estate as the desires of the community change. Neighborhoods experience a life cycle that complements the business cycle of growth, slowdown, contraction, and revitalization. Other examples include new businesses in a neighborhood, gentrification, zoning changes that result in different land use patterns, and monetary supply fluctuations due to inflation or deflation. All of these economic circumstances create opportunities for change such as growth or decline. The appraiser must consider the existing trends that affect the value of the subject property now and those that can be reasonably anticipated in the future.

Question 52

Change:

Answer 52

An economic principle that demonstrates how new social patterns, technology, employment, transportation, and other factors create new demands for real estate.

Question 53

Change:

Answer 53

Change: An economic principle that demonstrates how new social patterns, technology, employment, transportation, and other factors create new demands for real estate.

Question 54

Cluster Sampling

Answer 54

Cluster Sampling Cluster sampling is a random sample of a group or cluster of units of the population, sometimes known as grouped data analysis. Each unit of the selected cluster is a measurement of the sample. As shown in the photograph below, the cluster sample is representative of the general population as applied to the previous systematic sample. Cluster sampling is often preferred due to the economic benefits compared to other sampling techniques.

Question 55

Coefficient of Determination

Answer 55

A statistic indicating the proportion of the total variance in the dependent variable accounted for by the independent variable in a simple linear regression equation (one independent variable). Also identified as R-squared in many statistics software programs. The coefficient of determination is represented by the symbol "r2" (pronounced R-squared). r2 is always between 0% and 100%. An r2 of 1.00 would mean that 100% of the total variance in the dependent variable is explained by the independent variable. The higher the r2, the better; it measures how well the regression line fits the data. If r2 is equal to .70, that means that 70% of the variation is explained by that variable. The remaining variation is always 1-r2. In this case, it would be 1 - .30, or 30%.

Question 56

Commercial real estate:

Answer 56

A non-residential property for use by office, hotel, or a retail user. Nearly all local governments require restrictions for commercial locations in conjunction with residential properties.

Question 57

Commercial real estate:

Answer 57

Commercial real estate: A non-residential property for use by office, hotel, or a retail user. Nearly all local governments require restrictions for commercial locations in conjunction with residential properties.

Question 58

Comparable property:

Answer 58

Comparable property: A property that is analyzed within the sales comparison approach to arrive at an indicated value for the subject property.

Question 59

Competition

Answer 59

Competition in economics encompasses the notion that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently to secure the business of a third party by offering the most favorable terms.6 Basic concepts presented by Adam Smith in The Wealth of Nations (1776) and by later economists support the following scenario.7 Multiple real estate firms develop new projects or developments, which give consumers a greater selection and better products. The greater selection typically results in lower prices for the products, compared to what the price would be if there were no competition (monopoly) or little competition (oligopoly).8 The principle of competition is important when a property is selling above the cost of its replacement. For example, real estate developers who add a large profit above the cost of construction will eventually price their homes above the market value. Eventually, demand will decrease as competition increases, as other developers enter the market with lower-priced homes.

Question 60

Competition:

Answer 60

An economic principle stating that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently, by offering the most favorable goods and services.

Question 61

Competition:

Answer 61

Competition: An economic principle stating that individuals and firms strive for a greater share of a market to sell or buy goods and services, each acting independently, by offering the most favorable goods and services.

Question 62

Conformity

Answer 62

Conformity is a principle which states that property value is maximized when the characteristics of a property are in conformance with market expectations and demands. Conformity applies to both private preferences of buyers and renters (style, size, quality) as well as governmental regulations (zoning ordinances, building codes, land use restrictions). Stated simply, the more a property and its components are in harmony with the surrounding properties, the greater the contributory value. Conformity is sometimes referred to as homogeneity. Highest and best use will generally conform to the permitted uses due to zoning regulations and private restrictions. Example 1: A homeowner adjacent to a large university declines an offer from the university to purchase his property. Over time, his home most likely will decline in value after surrounding parcels are improved with classroom and office buildings, parking lots, and other uses that are beneficial to the university, because the home will no longer be in conformity with its surroundings. Example 2: A parcel of vacant land in a residential neighborhood is zoned to permit either apartments or professional offices. It is likely that construction of an apartment building would maximize property value, because it would be in conformity with the residential nature of the surrounding community.

Question 63

Conformity:

Answer 63

An economic principle which states that value maximizes when a property is in conformity with the demands of market participants.

Question 64

Conformity:

Answer 64

Conformity: An economic principle which states that value maximizes when a property is in conformity with the demands of market participants.

Question 65

Consistent use:

Answer 65

A principle that states the site and improvements must be valued on the basis of the same use.

Question 66

Consistent use:

Answer 66

Consistent use: A principle that states the site and improvements must be valued on the basis of the same use.

Question 67

Consumption:

Answer 67

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt.

Question 68

Contribution

Answer 68

Contribution holds that the value of a particular component of a property is dependent upon its contribution to the value of the entire property. For example, the contributing value of a new four-car garage to a property will be minimal if it is an over-improvement in the neighborhood. However, if this type of garage is common for the market area and property type, then value may increase commensurate with the cost of the garage.

Question 69

Contribution:

Answer 69

The value of a component of property depending upon its contribution to the value of the whole property. This principle is also known as marginal productivity.

Question 70

Contribution:

Answer 70

Contribution: The value of a component of property depending upon its contribution to the value of the whole property. This principle is also known as marginal productivity.

Question 71

Cost Approach:

Answer 71

Cost Approach: One of three appraisal methods used for estimating value that involves a separate value for the site and the present value of the improvements less accrued depreciation and obsolescence.

Question 72

Cost:

Answer 72

Cost: Is the amount expended (labor and/or materials) to produce an item.

Question 73

DCF

Answer 73

discounted cash flow analysis

Question 74

DCR

Answer 74

debt coverage ratio

Question 75

Debt coverage ratio (DCR).

Answer 75

debt coverage ratio (DCR). The ratio of net operating income to annual debt service (DCR = NOI/IM), which measures the relative ability of a property to meet its debt service out of net operating income; also called debt service coverage ratio (DSCR). A larger DCR typically indicates a greater ability for a property to withstand a reduction of income, providing an improved safety margin for a lender.

Question 76

Debt coverage ratio (DCR):

Answer 76

Debt coverage ratio (DCR): The ratio that indicates the property is producing adequate income to cover the loan payment. This ratio assists investors and lenders with their investment decisions. A DCR less than "one" means a property does not produce adequate income to make the loan payment.

Question 77

Delta (Δ)

Answer 77

In mathematics, change in a variable, symbolized by the upper case Greek letter delta. For example,Δx means “change in the variable x.”

Question 78

Demand segmentation:

Answer 78

Demand analysis that includes the investigation and identification of the most probable user including his or her preferences based on behavioral, motivational, and psychological factors.

Question 79

Demand segmentation:

Answer 79

Demand segmentation: Demand analysis that includes the investigation and identification of the most probable user including his or her preferences based on behavioral, motivational, and psychological factors.

Question 80

Demand:

Answer 80

The desire for a specific good or service.

Question 81

Demand:

Answer 81

Demand: The desire for a specific good or service.

Question 82

Demographics:

Answer 82

Demographics: The study of a population and its characteristics such as age, sex, familial status, occupation, income levels, etc.

Question 83

dependent variable

Answer 83

The variable being estimated (outcome or response variable) in a predictive model such as a multiple linear regression equation.

Question 84

Depreciation:

Answer 84

Depreciation: The difference between the cost of the improvements if it were new, and the present value of the improvements. Land does not "depreciate" or "wear out" so depreciation does not apply to the land.

Question 85

Descriptive statistics:

Answer 85

Descriptive statistics: The study of methods and tools in statistics for collecting data and mathematical models to describe and interpret data.

Question 86

Desire:

Answer 86

The motivation of an individual, group of persons, or business entity to purchase property.

Question 87

Desire:

Answer 87

Desire: The motivation of an individual, group of persons, or business entity to purchase property.

Question 88

Developer:

Answer 88

A person or company who purchases a tract of vacant land and develops the real estate with improvements to yield a profit.

Question 89

Developer:

Answer 89

Developer: A person or company who purchases a tract of vacant land and develops the real estate with improvements to yield a profit.

Question 90

Development patterns:

Answer 90

Patterns of growth that would affect consumer behavior in an area such as a river, forest, topography, transportation, etc.

Question 91

Development patterns:

Answer 91

Development patterns: Patterns of growth that would affect consumer behavior in an area such as a river, forest, topography, transportation, etc.

Question 92

Development process:

Answer 92

A process of real estate development whereby vacant land is identified, purchased and a design concept implemented.

Question 93

Development process:

Answer 93

Development process: A process of real estate development whereby vacant land is identified, purchased and a design concept implemented.

Question 94

Direct capitalization.

Answer 94

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.

Question 95

Discounted cash flow analysis (DCF)

Answer 95

The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams and the quantity and timing of the reversion, and discounts each to its present value at a specified yield rate.

Question 96

Discounted cash flow:

Answer 96

Discounted cash flow: In finance, the discounted cash flow (or DCF) approach describes a method of valuing a project, company, or asset using the concepts of the time value of money, by discounting future cash flows to present value.

Question 97

Discounting

Answer 97

1. Conversion of benefits received in the future (e.g., periodic incomes, cash flows, reversion) to present value. 2. Money paid at the beginning of a time period for the use of capital during that period; commonly deducted from the principal when the funds are advanced.

Question 98

Discounting:

Answer 98

Discounting: The method used to allow for loss of compound interest which money would typically earn if not invested in real estate. It is commonly used to convert anticipated future cash flows into a current value.

Question 99

Due diligence:

Answer 99

Due diligence: The process of exerting reasonable effort while compiling information for an analysis.

Question 100

Econometrics:

Answer 100

Econometrics: The application of mathematical and statistical techniques to economic data and problems.

Question 101

Economic base analysis:

Answer 101

This type of market analysis is the study of a specific macroeconomic market area along with the supply and demand factors for a specific property type focusing on local economics.

Question 102

Economic base analysis:

Answer 102

Economic base analysis: This type of market analysis is the study of a specific macroeconomic market area along with the supply and demand factors for a specific property type focusing on local economics.

Question 103

Economic Influences

Answer 103

Economic Influences relate to the financial capability of the market area occupants to own, rent, maintain, and/or renovate a property. The economic influences that an appraiser considers while performing the analysis include: Development trends Employment Income levels for households Occupancy versus rental levels Trends of property values Vacancy rates

Question 104

Effective purchasing power:

Answer 104

Occurs when a prospective purchaser has enough disposable income available to satisfy his or her desires, needs, and wants.

Question 105

Economics:

Answer 105

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Question 106

Economics:

Answer 106

Economics: Economics is the social science that studies the production, distribution, and consumption of goods and services.

Question 107

Effective gross income multiplier:

Answer 107

Effective gross income multiplier: The EGIM is the sales price divided by the effective gross income at stabilized occupancy. This calculation is utilized for investment properties.

Question 108

Effective gross income:

Answer 108

Effective gross income: The amount remaining after vacancy and collection loss is subtracted from potential gross income and miscellaneous income.

Question 109

Effective purchasing power:

Answer 109

Effective purchasing power: Occurs when a prospective purchaser has enough disposable income available to satisfy his or her desires, needs, and wants.

Question 110

EGI

Answer 110

effective gross income

Question 111

EGIM

Answer 111

effective gross income multiplier

Question 112

Ellwood Tables:

Answer 112

Ellwood Tables: Financial tables originally published in 1959 by their formulator, L.W. Ellwood, which were used to formulate computers and pocket calculators to solve mortgage-equity problems (See also "Six functions of dollar")

Question 113

Eminent domain:

Answer 113

The power of a government to take private property for public use, usually with compensation paid to the owner.

Question 114

Eminent domain:

Answer 114

Eminent domain: The power of a government to take private property for public use, usually with compensation paid to the owner.

Question 115

Environmental conditions

Answer 115

Environmental conditions consist of any artificial or natural features that affect a market area. These features include: Attractiveness of area Climate (temperatures, rainfall, dust, wind, etc.) Features important to wildlife Hazards of surrounding properties (smell, noise, trash, etc.) Land use patterns (currently and in the possible future) Liabilities (land slide, flooding, etc.) Maintenance of subject and surrounding properties Open space Property size Public utilities (electric, water, gas, sewer, cable, etc.) Subsurface terrain (marsh, rock, clay, sand, etc.) Topography (terrain and vegetation) Transportation (railway, commuter buses, etc.) Waterways

Question 116

Equity dividend

Answer 116

The portion of net operating income that remains after total mortgage debt service is paid but before ordinary income tax on operations is deducted; also called equity cash flow.

Question 117

Equity:

Answer 117

The value of a piece of property over and above any mortgage or other liabilities attached to it.

Question 118

Equity:

Answer 118

Equity: The value of a piece of property over and above any mortgage or other liabilities attached to it.

Question 119

Example: The average per capita income is $11,855, while the average household income is $23,776. This information estimates that there are two income-generating persons in each household, and one child. Question: Why is the average household income important? Question: Why is the monthly household allowance important? .

Answer 119

Answer: The household income predicts the amount of typical monthly household allowance Answer: The monthly household allowance helps determine if there is a need for the subject property.

Question 120

Expert:

Answer 120

An expert is someone who has successfully completed formal study, experience, and passed a state licensing exam, where applicable.

Question 121

Expert:

Answer 121

Expert: An expert is someone who has successfully completed formal study, experience, and passed a state licensing exam, where applicable.

Question 122

External obsolescence:

Answer 122

External obsolescence: Factors or circumstances that originate from outside the subject property that decrease a property's value. Examples include nuisances or hazards, reduced highest and best value due to rezoning, or economic recession.

Question 123

Externalities

Answer 123

Externalities is a principle which holds that an item or event external to the boundaries of the property can have a positive or negative impact on the property. External factors affecting the value of a property can be national or international in scope, such as a recession or economic crisis. These factors can also be regional or local, such as a local employer shutting down, or a new freeway being constructed. External factors may also be specific to a single property or a small number of properties, such as a wastewater treatment plant located immediately adjacent to an apartment building. Example: A small industrial park in a semi-rural area sees a marked increase in demand and property values after a new highway interchange is constructed one-half mile away

Question 124

Externality:

Answer 124

An economic principle pertaining to an item or event, which is external to the boundaries of the property. It can have a positive or negative effect on the property. Many of the forces that affect or influence real estate values pertain to governmental, physical, economic, and social factors.

Question 125

Externality:

Answer 125

Externality: An economic principle pertaining to an item or event, which is external to the boundaries of the property. It can have a positive or negative effect on the property. Many of the forces that affect or influence real estate values pertain to governmental, physical, economic, and social factors.

Question 126

Extracting adjustments - Cost Analysis

Answer 126

Cost Analysis In a previous chapter, we covered the principle of contribution, which states that the value of a particular feature or attribute of a property is based upon its contribution to the property. We are also aware that cost does not necessarily equal value. However, if an appraiser is somehow able to establish a link between cost and value, this link can sometimes be used to estimate adjustment amounts. Example: An appraiser is trying to estimate an adjustment for an outdoor all-weather sports court which is part of an agricultural-residential property. This court is new, and was installed at a cost of $80,000. The appraiser has no sales of properties with sports courts in order to extract an adjustment. The appraiser is able to analyze sales of properties with in-ground swimming pools; this analysis indicates that pools contribute 40% of their cost in value to the property. Because both pools and sports courts are recreational amenities with similar seasonal capabilities for use, the appraiser estimates that this 40% ratio of cost to value would likely be applicable. The appraiser applies this 40% factor to the cost of the subject's sports court (i.e., its contribution to value is 40% of its cost) and makes an adjustment of $32,000 to each of the comparable sales for this amenity.

Question 127

Extracting adjustments - Linear Regression

Answer 127

Linear Regression Regression analysis is somewhat similar to paired sales analysis, in that actual sales of properties are analyzed, and adjustments extracted based on the comparisons. What distinguishes regression analysis from paired sales analysis is that regression analysis usually depends on computer-based applications or programs, and requires larger sample sizes. Of course, regression analysis can be accomplished with smaller sample sizes, but like any other statistical application, it becomes more reliable as the sample sizes become larger. Simple regression utilizes only one independent variable. For example, we can analyze sale prices of commercial lots, using the size as the independent variable and the sale price as the dependent variable. After all, the sale price is dependent upon the lot size. This can easily be done by an appraiser, even without the help of a computer, with just a piece of graph paper. Multiple regression is more complex, and can be used to estimate adjustment amounts for several variables at once. In order for this analysis to be credible, it requires a computer program and a large amount of reliable data.

Question 128

Extracting adjustments - Market Survey Method

Answer 128

This method is sometimes also called the contingent valuation method (CVM), or stated preference method. The market survey method is just what it says: an appraiser will survey market participants, including buyers, sellers, renters, brokers, salespersons, property managers, other appraisers - anyone with market knowledge that could possibly be in a position to help the appraiser come up with an adjustment. After the appraiser surveys a sufficient number of individuals, a pattern should develop, which the appraiser can use as the basis for an adjustment. This type of technique is particularly useful when appraising stigmatized properties, properties that are subject to construction defects, or properties with structural stability issues.

Question 129

Extracting adjustments - Rent Analysis

Answer 129

Rent Analysis The Rent Analysis method of extracting adjustments is based on analysis of the additional rent that a feature would command in the market. This type of analysis can be applied to all types of properties, but it is most applicable to income-producing properties. Simply put, the amount of rent that is attributable to a particular feature or attribute is isolated. These rental amounts can be compared and a percentage adjustment extracted, or the additional rent may be multiplied by a GIM or divided by a capitalization rate to extract a contributory value for that feature. This analysis also can be applied in reverse; the rent loss due to a property's lack of a particular feature can also be multiplied or capitalized to arrive at an adjustment amount.

Question 130

Fair Market Value (FMV):

Answer 130

Fair Market Value (FMV): A term used in both law and accounting based on the economic term of "market value." It is the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

Question 131

Fair Market Value (FMV):

Answer 131

Fair Market Value (FMV): A term used in both law and accounting based on the economic term of "market value." It is the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

Question 132

FASB

Answer 132

Financial Accounting Standards Board

Question 133

Fee simple absolute:

Answer 133

Fee simple absolute: Fee simple estate is absolute ownership of real property, limited by the four basic government powers of taxation, eminent domain, police power, and escheat as well as encumbrances or conditions in the deed

Question 134

Fee simple absolute:

Answer 134

Fee simple absolute: Fee simple estate is absolute ownership of real property, limited by the four basic government powers of taxation, eminent domain, police power, and escheat as well as encumbrances or conditions in the deed.

Question 135

Fee simple ownership:

Answer 135

Absolute ownership of real property, limited only by the government powers of taxation, police power, eminent domain, and escheat. In addition, fee simple ownership could also be limited by certain encumbrances such as the mortgage loans, deed restrictions, unpaid taxes, easements, mechanics' liens, and leases.

Question 136

Fee simple ownership:

Answer 136

Fee simple ownership: Absolute ownership of real property, limited only by the government powers of taxation, police power, eminent domain, and escheat. In addition, fee simple ownership could also be limited by certain encumbrances such as the mortgage loans, deed restrictions, unpaid taxes, easements, mechanics' liens, and leases.

Question 137

Fieldwork:

Answer 137

Fieldwork: Market research by a personal visit to a real estate property to interview tenants, neighbors, etc. for compiling property and location data.

Question 138

Financially feasible:

Answer 138

Financially feasible: A criteria within highest and best use analysis that requires that a use must produce a positive return on investment.

Question 139

Financially feasible:

Answer 139

Financially feasible: A criteria within highest and best use analysis that requires that a use must produce a positive return on investment.

Question 140

FIRE (finance, insurance, real estate):

Answer 140

FIRE (finance, insurance, real estate): The study of capital and income that characterizes the financial services industries as part of the SIC/NAIS breakdown of types of industry: finance, insurance, and real estate. The SIC was replaced by the North American (Canada, USA, Mexico) Industry Classification System (NAICS) in 1997.

Question 141

FIRE (finance, insurance, real estate):

Answer 141

FIRE (finance, insurance, real estate): The study of capital and income that characterizes the financial services industries as part of the SIC/NAIS breakdown of types of industry: finance, insurance, and real estate. The SIC was replaced by the North American (Canada, USA, Mexico) Industry Classification System (NAICS) in 1997.

Question 142

A knowledgeable person would not pay more for a used property than a new property. Cost and value may be equal under the following circumstances:

Answer 142

- The property is new or proposed - The improvement represents the highest and best use of the property - Supply and demand are in balance

Question 143

Formulas for Capitalization Rate (CR) Gross Rent Multiplier (GRM) Expense and Vacancy Rate (EVR)

Answer 143

*Capitalization Rate* CR = **NET** Operating Income / Value *Gross Rent Multiplier / Gross Income Multiplier* GRM = Value / **GROSS** Income *Expense and Vacancy Rate* EVR = 1 - GRM x CR

Question 144

Frequency Distribution

Answer 144

Frequency Distribution A frequency distribution uses both qualitative and quantitative data placed in a table. This table summarizes groups of data and observations divided into specific classes as well as the number of occurrences in each class. In other words, class frequencies are the number of observations in each class. By organizing the data, results can show a variety of information such as income distributions for an area, sales prices of properties in a market area within a certain period of time, or other data that is important in a real estate appraisal. Typical graphs used with frequency distributions are column and bar charts, histograms, line graphs, and pie charts. The various types of graphs and charts are demonstrated after the example of a frequency distribution chart.

Question 145

Functional obsolescence:

Answer 145

Functional obsolescence: Imperfections in a property that cause a decrease in value such as poor design, ineffective utilization, outdated equipment, or super-adequacy.

Question 146

Fundamental analysis:

Answer 146

Fundamental analysis: A fundamental analysis forecasts demand based on specific information within the subject market. For instance, the appraiser utilizes capitalization rates for specific types of properties within the subject market area to estimate the value of the subject. This analysis relies on the appraiser's problem-specific data searches, interviews, and surveys: known as primary data.

Question 147

Fundamental capture method:

Answer 147

Fundamental capture method: A method that compares the subject's share of the market, adjusts the subject to the competition using quantifiable rating techniques, calculates the subject's historical capture rate, and other factors.

Question 148

GAAP

Answer 148

generally accepted accounting principles

Question 149

General data:

Answer 149

General data: Relates to information appropriate for many properties, which includes all of the four forces (social, economic, environmental/physical, and governmental).

Question 150

General data:

Answer 150

General data: Relates to information appropriate for many properties, which includes all of the four forces (social, economic, environmental/physical, and governmental).

Question 151

General merchandise, apparel, furniture and other (GAFO):

Answer 151

General merchandise, apparel, furniture and other (GAFO): In retailing, general merchandise such as apparel, furniture, etc.

Question 152

General merchandise, apparel, furniture and other (GAFO):

Answer 152

General merchandise, apparel, furniture and other (GAFO): In retailing, general merchandise such as apparel, furniture, etc.

Question 153

Gentrification:

Answer 153

Gentrification: The principle that an older lower-valued area, often an inner-city neighborhood, can be revitalized as properties are renovated or remodeled.

Question 154

Gentrification:

Answer 154

Gentrification: The principle that an older lower-valued area, often an inner-city neighborhood, can be revitalized as properties are renovated or remodeled.

Question 155

GIM

Answer 155

gross income multiplier

Question 156

GLA

Answer 156

gross leasable area

Question 157

Going concern value:

Answer 157

Going concern value: A type of value used for properties such as a restaurant or hotel which includes both tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate. Now considered an outdated term by many within the appraisal profession, it has largely been replaced by the term market value of the going concern.

Question 158

Going concern value:

Answer 158

Going concern value: A type of value used for properties such as a restaurant or hotel which includes both tangible and intangible assets of an established and operating business with an indefinite life, as if sold in aggregate. Now considered an outdated term by many within the appraisal profession, it has largely been replaced by the term market value of the going concern.

Question 159

Goods and Services:

Answer 159

Goods and Services: An economic output divided into physical goods and intangible services.

Question 160

Goods and Services:

Answer 160

Goods and Services: An economic output divided into physical goods and intangible services.

Question 161

Governmental influences

Answer 161

Governmental influences pertain to the laws that affect properties in the market area as well as the enforcement of these laws. The governmental influences an appraiser considers and analyzes include: Building, housing, and sanitary codes Code enforcement Environmental regulations Land use Local development levies (impact fees) Police and fire protection Rent controls School districts Special assessments Taxation Traffic patterns Zoning

Question 162

Gravity models:

Answer 162

Gravity models: A model within market delineation that predicts and describes behaviors that imitate gravitational interaction such as public transportation or real estate demand.

Question 163

Gravity models:

Answer 163

Gravity models: A model within market delineation that predicts and describes behaviors that imitate gravitational interaction such as public transportation or real estate demand.

Question 164

GRM

Answer 164

gross rent multiplier

Question 165

Gross income multiplier:

Answer 165

Gross income multiplier: The sales price divided by the gross income generated by the property; does not account directly for vacancy, collection loss, or operating expenses.

Question 166

Growth or expansion:

Answer 166

Growth or expansion: The preliminary stage in a life cycle that refers to increased development of an area.

Question 167

HBU

Answer 167

highest and best use

Question 168

Highest and best use:

Answer 168

Highest and best use: The reasonably probable and legal use of vacant land or an improved property which results in the highest value as a result of applying the four test criteria: physically possible, legally permissible, financially feasible, and the maximally profitable.

Question 169

Highest and best use:

Answer 169

Highest and best use: The reasonably probable and legal use of vacant land or an improved property which results in the highest value as a result of applying the four test criteria: physically possible, legally permissible, financially feasible, and the maximally profitable.

Question 170

i

Answer 170

nominal rate of interest

Question 171

Impact fee:

Answer 171

Impact fee: A fee required by local governments for proposed real estate development that helps the locality pay for costs of public services to the new development such as water, sewer, public schools, etc. These fees typically help the locality reduce the economic burden because of population growth within the area.

Question 172

Impact fee:

Answer 172

Impact fee: A fee required by local governments for proposed real estate development that helps the locality pay for costs of public services to the new development such as water, sewer, public schools, etc. These fees typically help the locality reduce the economic burden because of population growth within the area.

Question 173

Improved property:

Answer 173

Improved property: An addition to vacant land that increases the value such as a residential home, commercial property, streets, electric, or sewerage system.

Question 174

Improved property:

Answer 174

Improved property: An addition to vacant land that increases the value such as a residential home, commercial property, streets, electric, or sewerage system.

Question 175

In the Sales Comparison Approach, elements of comparison can be placed into two categories: intangible and tangible. Intangible are also sometimes called _____________ and are _______________

Answer 175

transactional adjustments Property rights conveyed Financing Conditions of sale Market conditions (time)

Question 176

In the Sales Comparison Approach, elements of comparison can be placed into two categories: intangible and tangible. Tanglible are also sometimes called ____________ and are _____________

Answer 176

property adjustments Tangible or property differences between the comparable sales and the subject include: Location, visibility, traffic patterns, market appeal, size, zoning, age, view, quality, and condition of improvements, or other factors.

Question 177

Income capitalization approach:

Answer 177

Income capitalization approach: Also known as the Income Approach. One of three appraisal methods based on the concept that a property's value relates to its income-producing potential.

Question 178

Increasing/decreasing returns:

Answer 178

Increasing/decreasing returns: An economic principle that states a feature, repair, addition, etc. might increase or decrease real estate values. As such, the laws of increasing or decreasing returns state that beyond a certain point, adding additional features may or may not increase value.

Question 179

Increasing/decreasing returns:

Answer 179

Increasing/decreasing returns: An economic principle that states a feature, repair, addition, etc. might increase or decrease real estate values. As such, the laws of increasing or decreasing returns state that beyond a certain point, adding additional features may or may not increase value.

Question 180

Inefficient market:

Answer 180

Inefficient market: A market that is characterized by an uneven flow of information, with goods and services that are not easily produced or transferable.

Question 181

Inefficient market:

Answer 181

Inefficient market: A market that is characterized by an uneven flow of information, with goods and services that are not easily produced or transferable.

Question 182

Inference:

Answer 182

Inference: An assumption of the future instead of the known conclusion.

Question 183

Inferential or inferred analysis:

Answer 183

Inferential or inferred analysis: The inferred analysis, often referred to as a trend analysis, is a technical analysis utilized to forecast changes in future value by analyzing historical information. An inferred analysis is not specific to a particular property or subject. A technique or analysis that compares the subject to general market indicators such as comparable property data, secondary data surveys and forecasts, the subject's historical performance, local economic analysis, and other factors.

Question 184

Inferential statistics:

Answer 184

Inferential statistics: The systems and techniques in statistics for making probability-based decisions and accurate predictions based on incomplete (sample) data.

Question 185

Information asymmetry:

Answer 185

Information asymmetry: During the negotiation process, only one party is privy to important information that may affect the outcome of the transaction. Information asymmetry causes inefficient markets, since not all the market participants have access to the information needed for their decision-making processes.

Question 186

Information asymmetry:

Answer 186

Information asymmetry: During the negotiation process, only one party is privy to important information that may affect the outcome of the transaction. Information asymmetry causes inefficient markets, since not all the market participants have access to the information needed for their decision-making processes.

Question 187

Intangible:

Answer 187

Intangible: An item typically described in economics, accounting, or financial transactions as a saleable portion of a property or business that does not possess inherent productive value; incapable of being touched.

Question 188

Internal rate of return (IRR).

Answer 188

The annualized yield rate or rate of return on capital that is generated within an investment or portfolio over a period of ownership. Alternatively, the indicated return on capital associated with a projected or pro forma income stream.

Question 189

IRR

Answer 189

internal rate of retur

Question 190

Land residual technique

Answer 190

Land residual technique. A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land’s contribution to the total property.

Question 191

Law of Diminishing Returns

Answer 191

Law of Diminishing Returns states that if a feature, repair, addition, or other improvement will increase real property value, there is a point where a more elaborate feature, a more expensive repair, a larger addition, or a more significant improvement will no longer add value commensurate with its cost. This point is known as the point of decreasing returns. Example: Renovating the facade of an older shopping center may be a wise investment, which will increase the value and attract new tenants. However, tearing up and resurfacing the parking lots and access roads in order to improve traffic flow may not result in additional income or value.

Question 192

Leased fee interest:

Answer 192

Leased fee interest: The property owner's ownership interest in a property that is subject to a lease agreement.

Question 193

Leased fee interest:

Answer 193

Leased fee interest: The property owner's ownership interest in a property that is subject to a lease agreement.

Question 194

Leasehold interest:

Answer 194

Leasehold interest: The interest held by the lessee or tenant(s) in a property based on the lease agreement.

Question 195

Leasehold interest:

Answer 195

Leasehold interest: The interest held by the lessee or tenant(s) in a property based on the lease agreement.

Question 196

Legally permissible uses:

Answer 196

Legally permissible uses: A criteria within highest and best use analysis that the appraiser applies by considering both public and private regulations that affect and limit uses for the subject property. These regulations might include easements, zoning, or other land use regulations such as CC&R's (covenants, conditions, and restrictions) which may be recorded with the deed.

Question 197

Legally permissible uses:

Answer 197

Legally permissible uses: A criteria within highest and best use analysis that the appraiser applies by considering both public and private regulations that affect and limit uses for the subject property. These regulations might include easements, zoning, or other land use regulations such as CC&R's (covenants, conditions, and restrictions) which may be recorded with the deed.

Question 198

Levels of a market analysis:

Answer 198

Levels of a market analysis: During the research phase of the market analysis, an appraiser determines the level of analysis appropriate for the appraisal. These levels are the inferred analysis and the fundamental analysis.

Question 199

Levels of a market analysis:

Answer 199

Levels of a market analysis: During the research phase of the market analysis, an appraiser determines the level of analysis appropriate for the appraisal. These levels are the inferred analysis and the fundamental analysis.

Question 200

Levels of Measurement Ordinal measurement

Answer 200

Ordinal measurement arranges data with values from the highest to the lowest. An example might include rating a specific property-by-property class, such as Class A, B, or C for an office building. An example of this concept is shown (Tables 7 and 8) in Chapter 3. An ordinal measurement can be either qualitative or quantitative.

Question 201

Levels of Measurement Interval

Answer 201

Interval is a quantitative data measurement in which the distance between the observations is measurable and meaningful. A common example is temperature measurement. The interval between 30 degrees and 40 degrees is the same as the interval between 80 degrees and 90 degrees. We can use addition and subtraction to analyze interval variables, but not multiplication and division; for example, it is not correct to state that 60 degrees is twice as hot as 30 degrees.

Question 202

Levels of Measurement Nominal measurement

Answer 202

Nominal measurement assigns observations to predetermined categories. Since no mathematical calculations are performed, this nominal level of measurement is qualitative only. Analyzing all recent sales in a market and assigning them into categories based on the property's use (residential, commercial, industrial, etc.) would be an example of nominal measurement. One category is not necessarily better than, or superior, to another.

Question 203

Levels of Measurement Ratio

Answer 203

Ratio measurement includes all features of interval data with the true zero point. This level works with multiplication and division. All statistical measures can be used for a variable measured at the ratio level, as all necessary mathematical operations are defined. The central tendency of a variable measured at the ratio level can be represented by, in addition to its mode, its median, or its arithmetic mean.3 Ratio measurement is quantitative only. For instance, a 50-year old building is twice (or 200%) the age of a 25-year old building. In the chart below, we are comparing the number of square feet of office space available in a market, based on building class. There are 240,000 square feet of Class C office space available in this market, but only 70,000 square feet of Class A office space available. We can conclude, based on this chart, that there are 3.4 times more Class C office space available in this market than Class A space.

Question 204

Linear regression

Answer 204

A type of statistical analysis used to investigate a linear relationship between a dependent variable and one or more independent variables; used to predict the value of the dependent variable on the basis of the values of the independent variables and to develop an understanding of how a unit change in an independent variable relates to change in the dependent variable. Linear regression models employing a single independent variable are called simple linear regression models. Those employing more than one independent variable are called multiple linear regression models. Method of Least Squares - linear regression equation works by calculating the distance between each data point and the mean and then squaring that distance. Then, a line is created that minimizes the sum of the squared values.

Question 205

Linear regression:

Answer 205

Linear regression: A process developed in statistical analysis for predicting the value of an unknown variable, based on its relationship with a known variable.

Question 206

Macroeconomics:

Answer 206

Macroeconomics: A branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics

Question 207

Macroeconomics:

Answer 207

Macroeconomics: A branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics

Question 208

Market adjustments:

Answer 208

Market adjustments: Business and real estate cycles travel through an adjustment process due to the length of time it takes to conceive an idea, design a plan of action, finance, and construct the project. Because of these delays, there is a great potential for disequilibrium.

Question 209

Market adjustments:

Answer 209

Market adjustments: Business and real estate cycles travel through an adjustment process due to the length of time it takes to conceive an idea, design a plan of action, finance, and construct the project. Because of these delays, there is a great potential for disequilibrium.

Question 210

Market analysis:

Answer 210

Market analysis: A market analysis is the classification and study of current supply and demand conditions in a particular area for a specific type of property. Further, the market analysis develops the supportable basis for determining highest and best use, vacant or improved.

Question 211

Market analysis:

Answer 211

Market analysis: A market analysis is the classification and study of current supply and demand conditions in a particular area for a specific type of property. Further, the market analysis develops the supportable basis for determining highest and best use, vacant or improved.

Question 212

Market area delineation concepts:

Answer 212

Market area delineation concepts: Define the primary and secondary market areas and include the types of tenants or clientele the building might attract and the locations as well as time-distance relationships to nearby complementary services such as restaurants, schools, voting districts, etc. compared to the competition.

Question 213

Market area delineation concepts:

Answer 213

Market area delineation concepts: Define the primary and secondary market areas and include the types of tenants or clientele the building might attract and the locations as well as time-distance relationships to nearby complementary services such as restaurants, schools, voting districts, etc. compared to the competition.

Question 214

Market delineation

Answer 214

Within a market segment, market delineation identifies the demand for the subject property as determined by the market participants and their desire for the property. Market delineation is often accomplished by identifying the property type and features, the market area, and the available substitute and complimentary properties. Market delineation identifies specific boundaries where a subject property is located. This market also includes the comparable land and improved sales as well as rental properties. Consideration for a property includes various preferences due to the market participant's needs and desires. For instance, retirees, married couples, or singles might choose retirement homes, single-family subdivisions, and condominiums. As a result, developers differentiate their properties by offering various features and amenities that distinguish them from their competition, such as: Different style homes Various views and other amenities Different lot sizes Various price ranges Other considerations, including energy-efficient and "green" homes Access to community facilities such as schools, public parks, churches, employment centers, and other recreational facilities When market delineation requires research into a broad market area, the appraiser should focus on counties, cities, and regions with similar economic characteristics in the area where the subject is located. If, however, the subject property is a special-purpose property such as security training facility, food manufacturing or processing plant, steel mill, etc., the market can be expanded to include a region, several states, or the entire United States.

Question 215

Market delineation:

Answer 215

Market delineation: Defines the geographic demand for a specific property.

Question 216

Market delineation:

Answer 216

Market delineation: Defines the geographic demand for a specific property.

Question 217

Market participants:

Answer 217

Market participants: Entities involved in a real estate transaction that receive and possibly act upon all relevant information.

Question 218

Market participants:

Answer 218

Market participants: Entities involved in a real estate transaction that receive and possibly act upon all relevant information.

Question 219

Market participations - examples

Answer 219

Agents/Brokers Buyers/Sellers Borrowers/Owners Accountants Appraisers Asset Managers Builders/Developers Investors Lawyers Lessor/Lessee Mortgagors/Mortgagees Property Managers Planners

Question 220

Market research:

Answer 220

Market research: A method of analyzing the market to determine the wants and needs of the population.

Question 221

Market research:

Answer 221

Market research: A method of analyzing the market to determine the wants and needs of the population.

Question 222

Market Segmentation

Answer 222

Market Segmentation As it pertains to real property, market segmentation separates the market into different types of properties, such as office, residential, lodging, or residential multi-family. Further, demand for specific property types is correlated with population, employment, development, and location. A true market segment meets all of the following criteria: - Distinct from other segments - Homogeneous or consistent within the segment - Responds similarly to a market stimulus, and - Reached by a market intervention

Question 223

Market segmentation:

Answer 223

Market segmentation: Defines and subdivides a large homogenous market into segments based on location, demographics, and consumer behavior.

Question 224

Market segmentation:

Answer 224

Market segmentation: Defines and subdivides a large homogenous market into segments based on location, demographics, and consumer behavior.

Question 225

Market value:

Answer 225

Market value: Generally considered the most probable price that a property will sell for, under all conditions of a fair sale, with each party acting with full knowledge and in their own best interest. There are many different specific definitions of market value in common use by appraisers.

Question 226

Market value:

Answer 226

Market value: Generally considered the most probable price that a property will sell for, under all conditions of a fair sale, with each party acting with full knowledge and in their own best interest. There are many different specific definitions of market value in common use by appraisers.

Question 227

Market:

Answer 227

Market: A place where goods and services are exchanged, often between buyers and sellers.

Question 228

Market:

Answer 228

Market: A place where goods and services are exchanged, often between buyers and sellers.

Question 229

Marketability analysis:

Answer 229

Marketability analysis: A marketability analysis or study consists of interviews, comprehensive data, maps, tables, etc. and demonstrates the marketability of a specific property or the possible future of an existing property.

Question 230

Marketability analysis:

Answer 230

Marketability analysis: A marketability analysis or study consists of interviews, comprehensive data, maps, tables, etc. and demonstrates the marketability of a specific property or the possible future of an existing property.

Question 231

Maximally productive:

Answer 231

Maximally productive: A criteria within highest and best use analysis that identifies the most profitable use to which a vacant or improved property can be put.

Question 232

Maximally productive:

Answer 232

Maximally productive: A criteria within highest and best use analysis that identifies the most profitable use to which a vacant or improved property can be put.

Question 233

Measure of dispersion:

Answer 233

Measure of dispersion: Describes the differences within a population in a statistical calculation.

Question 234

Metropolitan statistical area (MSA):

Answer 234

Metropolitan statistical area (MSA): An area of one or more adjacent cities and/or counties with at least one urban core area and a population above 50,000 persons.

Question 235

Microeconomics:

Answer 235

Microeconomics: A principle of economics that studies individuals, households, and businesses, in order to better understand their decisions regarding the use of their resources.

Question 236

Microeconomics:

Answer 236

Microeconomics: A principle of economics that studies individuals, households, and businesses, in order to better understand their decisions regarding the use of their resources.

Question 237

Miscellaneous Income:

Answer 237

Miscellaneous Income: Excess income such as laundry, utilities, interest, interest earned on capital improvement reserve accounts, monthly management operating accounts, and bank deposits such as CDs and treasury notes, insurance reimbursements, storage bin rentals, garage/parking rents, furniture rental income, clubhouse rental, special fees for the pool or health club, concessions from vending machines, pay telephones, or other additional income or fees not accounted for elsewhere.

Question 238

Mode:

Answer 238

Mode: The number that occurs most frequently within statistical analysis

Question 239

Mortgage:

Answer 239

Mortgage: The transfer of an interest in property to a lender as a security for a debt or during the loan period. During this loan period, the property is the lender's security for a debt.

Question 240

Mortgage:

Answer 240

Mortgage: The transfer of an interest in property to a lender as a security for a debt or during the loan period. During this loan period, the property is the lender's security for a debt.

Question 241

Neighborhood:

Answer 241

Neighborhood: An area within a larger city, town, or suburb with geographic boundaries.

Question 242

Neighborhood:

Answer 242

Neighborhood: An area within a larger city, town, or suburb with geographic boundaries.

Question 243

Net income ratio:

Answer 243

Net income ratio: Complements the operating expense ratio by demonstrating the net income percentage of the potential gross income.

Question 244

Net operating income (NOI):

Answer 244

Net operating income (NOI): The NOI is calculated by subtracting vacancy, collection loss, and operating expenses from gross income. However, NOI does not deduct interest, loan amortization, depreciation, or income taxes.

Question 245

NIR

Answer 245

net income ratio

Question 246

NOI

Answer 246

net operating income

Question 247

Normal distribution:

Answer 247

Normal distribution: A smooth symmetrical bell-shaped curve. The normal distribution can describe many populations.

Question 248

North American Industry Classification System (NAICS):

Answer 248

North American Industry Classification System (NAICS): The standard used by federal statistical agencies to classify businesses for collecting, analyzing, and publishing statistical data related to the U.S. business economy.

Question 249

NPV

Answer 249

net present value

Question 250

OER

Answer 250

operating expense ratio

Question 251

Office buildings range in size from under 10,000 to over a million square feet. These office buildings are placed into three categories: low-rise (XXX to XXX stories), mid-rise (XXX to XXX stories), and high-rise (XXX stories or more).

Answer 251

low-rise -1 to 3 stories mid-rise - 4 to 15 stories), high-rise - 16 stories or more).

Question 252

Consumption:

Answer 252

Consumption: Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt.

Question 253

Operating expenses:

Answer 253

Operating expenses: The essential expenses needed to sustain income streams for the operation of the property. Operating expenses generally include fixed and variable expenses.

Question 254

Operating statement ratios:

Answer 254

Operating statement ratios: The comparison of expenses and revenue of a property.

Question 255

Opportunity Cost

Answer 255

Opportunity Cost is the loss of income or opportunities as the result of not choosing an alternative. Example: A commercial real estate company invests $2 million to acquire another commercial real estate firm and their office building instead of re-investing the money in an interest-bearing Certificate of Deposit. The opportunity cost of this decision would be the interest income that they did not receive because the $2 million was not reinvested in a CD. If the correct decision was made, the actual income received should exceed the opportunity cost.

Question 256

Opportunity cost:

Answer 256

Opportunity cost: An economic principle that describes the income or opportunity that is lost because an alternative was not chosen.

Question 257

Opportunity cost:

Answer 257

Opportunity cost: An economic principle that describes the income or opportunity that is lost because an alternative was not chosen.

Question 258

Overall rate (OAR):

Answer 258

Overall rate (OAR): The OAR or Ro is calculated by dividing the NOI by the sales price of a property.

Question 259

Ownership:

Answer 259

Ownership: The state or fact of exclusive rights and control over property, which may be an object, land/real estate, or some other kind of property (like government-granted monopolies collectively referred to as intellectual property). It is embodied in an ownership right also referred to as title. Ownership is the key building block in the development of the capitalist socio-economic system.

Question 260

Ownership:

Answer 260

Ownership: The state or fact of exclusive rights and control over property, which may be an object, land/real estate, or some other kind of property (like government-granted monopolies collectively referred to as intellectual property). It is embodied in an ownership right also referred to as title. Ownership is the key building block in the development of the capitalist socio-economic system.

Question 261

Paired Sale Technique:

Answer 261

Paired Sale Technique: The most common data analysis technique in the sales comparison approach, also known as paired data analysis, paired sales analysis, or matched pairs analysis. In essence, an appraiser locates several pairs of sales that are similar except for one feature. The difference in the sales price for two sales is attributed to one dissimilar feature. The paired data set analysis, therefore, is practical when adjusting for one element of comparison.

Question 262

Extracting adjustments - Paired sales technique

Answer 262

1. Locate sales of similar properties that can be paired 2. Isolate a single factor that influenced value 3. Subtract the price of each sale to extract the value of a single factor 4. Apply the adjustment in the Sales Comparison Approach

Question 263

Parameter:

Answer 263

Parameter: Any factor that determines a range which restricts a process or policy. For instance, a zoning ordinance may limit the type of building allowed within a specific district.

Question 264

PGI

Answer 264

potential gross income

Question 265

PGIM

Answer 265

potential gross income multiplier

Question 266

Physically possible uses:

Answer 266

Physically possible uses: A criteria within highest and best use analysis that pertains to limitations caused by topography, terrain, wetlands, conservation easements, poor drainage, and limited access or unstable subsoil conditions.

Question 267

Physically possible uses:

Answer 267

Physically possible uses: A criteria within highest and best use analysis that pertains to limitations caused by topography, terrain, wetlands, conservation easements, poor drainage, and limited access or unstable subsoil conditions.

Question 268

PITI

Answer 268

principal, interest, taxes, and insurance

Question 269

PMT

Answer 269

payment

Question 270

Population growth:

Answer 270

Population growth: Growth of the population due to new employment in the area, new schools, shopping, or other characteristics desirable by consumers.

Question 271

Population trends:

Answer 271

Population trends: The number of people in the primary and secondary trade areas from the most recent census information as well as projections from state, regional, and local government agencies.

Question 272

Potential Gross Income (PGI):

Answer 272

Potential Gross Income (PGI): The total amount of income from all sources of rent for the income-producing property, based on 100% occupancy.

Question 273

Present value:

Answer 273

Present value: The value of real estate on a specific date calculated by discounting future income to reflect the time value of money and other factors.

Question 274

Price indices:

Answer 274

Price indices: The average of statistical prices for a class of goods or services in a region for an interval of time. These prices compare the difference between periods or geographical locations.

Question 275

Primary data:

Answer 275

Primary data: Data that has been compiled for a specific purpose, and has not been collated or merged with others. The primary data is gathered by the appraiser and relates to specific markets in which the property is located and may include specific sales information, surveys of buyers' preference, absorption statistics for the assignment, and competitive inventory surveys.

Question 276

Production:

Answer 276

Production: In microeconomics, production is quite simply the conversion of inputs into outputs. It is an economic process that uses resources to create a good or service that is suitable for exchange.

Question 277

Production:

Answer 277

Production: In microeconomics, production is quite simply the conversion of inputs into outputs. It is an economic process that uses resources to create a good or service that is suitable for exchange.

Question 278

Psychographic:

Answer 278

Psychographic: The study of consumer behaviors within a market segment such as level of education, income, occupation, familial status, age, sex, race, and other factors.

Question 279

PTCF

Answer 279

pretax cash flow

Question 280

purchasing power

Answer 280

Purchasing power or transferability, is the number of goods/services that can be purchased with a unit of currency. This power must be greatly considered in the estimation of a property's value, as demonstrated in the next example. Even if utility, scarcity, and desire are satisfied, a property will not be purchased if the target market cannot afford it. Further, purchasing power does not include physical mobility, but rather the control and possession of all the rights of ownership.3

Question 281

PV

Answer 281

present value

Question 282

Question: What are the factors that an appraiser must identify and analyze when researching the effect on use and value of real estate?

Answer 282

Answer: Standards Rule 1-3 (a & b) states, "when necessary for credible assignment results in developing a market value opinion, an appraiser must identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such regulations, economic supply and demand, and the physical adaptability of the real estate, market area trends, and develop an opinion of the highest and best use of the real estate." Standards Rule 1-4 (a-g) states, "in developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results ... in the sales comparison, cost, and income approach."17 In conclusion, an essential step in developing an opinion of market value is the development of a highest and best use opinion of the subject property, which, in turn, determines which valuation approaches will be developed, which comparable sales are to be utilized, and ultimately what approach or approaches are given the most weight in final reconciliation. The end result is that the public is protected when an appraiser provides appraisal services in an independent, impartial, objective, and unbiased manner.

Question 283

What happens in a contract for deed when the seller retains the legal title to the property?

Answer 283

The purchaser is permitted to take possession of the real estate for most purposes other than legal ownership.

Question 284

Question: What type of sampling technique does the Bureau of the Census perform for the Department of Housing and Urban Development?

Answer 284

Stratified sampling To ensure quality, the survey questions are programmed into the field representatives' computers for completion by either telephone or personal visits.

Question 285

R

Answer 285

basic capitalization rate

Question 286

R E

Answer 286

equity capitalization rate (spoken as "R sub E"

Question 287

R L

Answer 287

land capitalization rate (spoken as "R sub-L")

Question 288

R M

Answer 288

mortgage capitalization rate (spoken as "R sub M")

Question 289

R O

Answer 289

overall capitalization rate

Question 290

R-squared value or R2:

Answer 290

R-squared value or R2: The square of the correlation coefficient. The correlation coefficient determines the reliability of the linear relationship between the x and y values. The best trendline is indicated when the R-squared (R2) calculation is closest to 1.

Question 291

Random Sampling

Answer 291

Random Sampling results in an unbiased selection of market participants from within the population. An example of random sampling would entail selecting any of the housing units in the neighborhood below for analysis. The best results from random sampling occur when the population is homogeneous

Question 292

Range:

Answer 292

Range: The difference between the smallest and the largest numbers within the list in statistical analysis.

Question 293

Raw land:

Answer 293

Raw land: Undeveloped vacant land that does not have any infrastructure or other improvements such as utilities.

Question 294

Raw land:

Answer 294

Raw land: Undeveloped vacant land that does not have any infrastructure or other improvements such as utilities.

Question 295

R B

Answer 295

building capitalization rate (spoken as "R sub B")

Question 296

Real Estate Cycle - 1 stage explanation

Answer 296

Expansion is the preliminary stage in a life cycle that refers to increased development of an area. During this time, costs are stable, or they may be reduced due to economies of scale achieved by volume increases. As the pool of buyers increases, profits also increase. This stage is characterized by rising occupancy, absorption rates, and increasing prices. An example would be a mixed-use development where financing is available for construction. As a result, many homes are constructed, along with shopping facilities and restaurants. This stage is rapid compared to the other stages since profit is higher and money is typically more readily available.

Question 297

Real Estate Cycle - 2nd stage explanation

Answer 297

Contraction follows the growth stage, especially when an area grows at a slower rate. In other words, absorption rates, construction, and rental rates begin to decline. At the beginning of this stage, competition among sellers increases causing decreases in profits. At this stage, eventually it becomes less profitable to build, as inventory increases.

Question 298

Real Estate Cycle - 3rd stage explanation

Answer 298

**Recession** occurs when an economy or area can no longer compete at a profitable level due to decreases in sales, occupancy, absorption rates, and construction. Other economic factors take place such as increases in unemployment and lack of disposable income. If the recession is national (as opposed to local or regional) in its scope, the government typically responds with lower interest rates to maintain construction, and to promote refinancing of mortgages, which increases disposable income. During this time, however, older improvements may become functionally inadequate due to age and lack of funds for renovation. As a result, maintenance levels decrease causing a loss of market appeal and declining values.

Question 299

Real Estate Cycle - 4 stages

Answer 299

Expansion Contraction Recession Recovery

Question 300

Real Estate Cycle - 4th stage explanation

Answer 300

Recovery occurs after a decline and before the growth stage occurs again. During this time, sales, occupancy, absorption rates, and construction starts stabilize. This stage occurs based on current economic conditions, proximity to employment, transportation centers, and other factors. Because of the basic cyclical nature of markets, it is unusual for the business and real estate cycles to experience a continual upward moment.

Question 301

Real estate investment trust (REIT):

Answer 301

Real estate investment trust (REIT): A tax designation for a corporation investing in real estate, reducing or eliminating corporate income taxes. In return, REITs require distribution of 90% income, which may be taxable, into the hands of the investors.

Question 302

Real estate investment trust (REIT):

Answer 302

Real estate investment trust (REIT): A tax designation for a corporation investing in real estate, reducing or eliminating corporate income taxes. In return, REITs require distribution of 90% income, which may be taxable, into the hands of the investors.

Question 303

Real estate market:

Answer 303

Real estate market: A succession of submarkets based on participants with various desires and needs that change autonomously of one another, based on a group of complementary land uses that may be divided by natural barriers, political boundaries, districts, income levels of inhabitants, or streets.

Question 304

Real estate market:

Answer 304

Real estate market: A succession of submarkets based on participants with various desires and needs that change autonomously of one another, based on a group of complementary land uses that may be divided by natural barriers, political boundaries, districts, income levels of inhabitants, or streets.

Question 305

Recession:

Answer 305

Recession: The general contraction of the business cycle in economics during a sustained period. This occurrence is typically over two consecutive quarters of negative GDP growth.

Question 306

Recession:

Answer 306

Recession: The general contraction of the business cycle in economics during a sustained period. This occurrence is typically over two consecutive quarters of negative GDP growth.

Question 307

Regression analysis

Answer 307

A statistical method that examines the relationship between one or more independent variables and a dependent variable. Regression models can be used to examine the structure of a relationship or to forecast dependent variable values. Simple linear regression has one independent variable, whereas multiple linear regression includes more than one independent variable.

Question 308

Residual income:

Answer 308

Residual income: The amount of money an investor retains after debt is paid. Examples include before-tax cash flow or an equity dividend.

Question 309

Sales Comparison Approach:

Answer 309

Sales Comparison Approach: Also known as the market data approach or market approach, although these two alternative terms are generally considered outdated. It is one of three appraisal methods for estimating value within an appraisal. This approach compares and analyzes the subject property to the sales prices of similar or comparable properties recently sold.

Question 310

Sales Comparison Approach:

Answer 310

Sales Comparison Approach: Also known as the market data approach or market approach, although these two alternative terms are generally considered outdated. It is one of three appraisal methods for estimating value within an appraisal. This approach compares and analyzes the subject property to the sales prices of similar or comparable properties recently sold.

Question 311

Sales Comparison Approach:

Answer 311

Sales Comparison Approach: Also known as the market data approach or market approach, although these two alternative terms are generally considered outdated. It is one of three appraisal methods for estimating value within an appraisal. This approach compares and analyzes the subject property to the sales prices of similar or comparable properties recently sold.

Question 312

Sample:

Answer 312

Sample: A single item within a group such as a population.

Question 313

Scarcity:

Answer 313

Scarcity: Scarcity is a factor of value directly associated to supply and demand. When an inadequate supply of real estate in a particular location results in unfavorable demand/supply relationships, prices increase.

Question 314

Scarcity:

Answer 314

Scarcity: Scarcity is a factor of value directly associated to supply and demand. When an inadequate supply of real estate in a particular location results in unfavorable demand/supply relationships, prices increase.

Question 315

Secondary data:

Answer 315

Secondary data: Encompasses publications and other sources of information that were prepared by someone other than the appraiser. Sources of secondary data may include government reports, chamber of commerce publications, census reports, rent studies, published sales data services, etc.

Question 316

Seller:

Answer 316

Seller: A market participant who wishes to transfer ownership of his or her property to a purchaser in exchange for compensation.

Question 317

Seller:

Answer 317

Seller: A market participant who wishes to transfer ownership of his or her property to a purchaser in exchange for compensation.

Question 318

Seller:

Answer 318

Seller: A market participant who wishes to transfer ownership of his or her property to a purchaser in exchange for compensation.

Question 319

Six-Step Process:

Answer 319

Six-Step Process: A process used within most market/marketability analyses to determine market conditions such as supply and demand.

Question 320

Social Science:

Answer 320

Social Science: The social sciences comprise academic disciplines concerned with the study of the social life of human groups and individuals including anthropology, communication studies, economics, human geography, history, political science, psychology, and sociology.

Question 321

Social Science:

Answer 321

Social Science: The social sciences comprise academic disciplines concerned with the study of the social life of human groups and individuals including anthropology, communication studies, economics, human geography, history, political science, psychology, and sociology.

Question 322

Social trend

Answer 322

Social trends are often indicated through study and analysis of population characteristics. In the analysis of a market area, the appraiser identifies relevant social influences that affect property values, the overall desirability of the area, and future demand. The influences might include: Age levels Community associations Crime statistics Cultural groups Educational characteristics Employment levels and categories Family / Household configuration Neighborhood organizations Population density Skill levels

Question 323

Socio-economic status (SES):

Answer 323

Socio-economic status (SES): A measure of a person's social and economic condition as compared to others, based on income, education, and occupation.

Question 324

Specific data:

Answer 324

Specific data: Relates to information used directly in the analysis of the subject property and while encompassing the comparables used in the valuation process.

Question 325

Specific data:

Answer 325

Specific data: Relates to information used directly in the analysis of the subject property and while encompassing the comparables used in the valuation process.

Question 326

Spotting Technique:

Answer 326

Spotting Technique: A market analysis based on drive times, customer segments, and household incomes. This widely used technique for market delineation is utilized for many purposes including residential, retail, hotel/motel, and industrial analysis for customer loyalty programs, transportation models, proposed development, etc.

Question 327

Spotting Technique:

Answer 327

Spotting Technique: A market analysis based on drive times, customer segments, and household incomes. This widely used technique for market delineation is utilized for many purposes including residential, retail, hotel/motel, and industrial analysis for customer loyalty programs, transportation models, proposed development, etc.

Question 328

Stabilized vacancy:

Answer 328

Stabilized vacancy: The vacancy reflected for a specific property and its economical position compared to the competition.

Question 329

standard deviation is also known as _________________

Answer 329

standard deviation is also known as the standard error of the mean.

Question 330

Standard deviation:

Answer 330

Standard deviation: The difference of the observations from the mean in a statistical analysis. According to the principles of statistics, in a normal distribution, 66% of observations are within one standard deviation from the mean while 95% are within two standard deviations.

Question 331

Statistics: .

Answer 331

Statistics: The collection, analysis, interpretation, and presentation of data often used in mathematics and scientific research.

Question 332

Stratified Sampling

Answer 332

Stratified Sampling Stratified sampling occurs when a population is divided into equally selective groups and randomly sampled into subgroups. These subgroups are known as stratums. This technique is useful when the final sample has particular characteristics of the general population. This type of sampling uses some of the characteristics of cluster sampling and systematic sampling. For this sample, each home selected was constructed of similar building materials within a two year time frame, and is between 2,200 and 2,500 square feet. As shown in the stratified sample example below, every fourth unit within the cluster is selected. Since bias is possible, a population with homogeneous subgroups is essential for accuracy.

Question 333

Subdivision:

Answer 333

Subdivision: An area of land divided into lots for building an improvement, typically a residential home. Many government authorities require a subdivision plat or survey; is recorded once the lots are divided for tax purposes.

Question 334

Submarket:

Answer 334

Submarket: A submarket is a specialized sub-section of a market based on the geographic or economic conditions. A submarket is a secondary market compared to the primary market.

Question 335

Submarket:

Answer 335

Submarket: A submarket is a specialized sub-section of a market based on the geographic or economic conditions. A submarket is a secondary market compared to the primary market.

Question 336

Substitution

Answer 336

Substitution considers the replacement of one item with another. In other words, an informed buyer will not pay more for a property than for a similar property or the cost of producing a substitute property with the same utility. As such, the property value is determined by the price for which another equally desirable property can be acquired or produced. If several similar properties are simultaneously available in the market, the one with the lowest price will attract the most interest. This principle applies to each of the three traditional approaches to value utilized within the appraisal process: Sales Comparison Approach Income Approach Cost Approach The principle of substitution applies to residential and commercial properties, regardless if the property is owner- or tenant-occupied. However, there are specific situations where a purchaser may be willing to pay a higher price for a particular location, style, or amenity, especially if this characteristic is unique in the market. Example: In a developing suburban area, restaurant sites are selling for $10 per square foot, and there are seven such sites currently on the market. If one of the sellers lowers the asking price to $8.50 per square foot, this property would attract the most buyer interest. However, if another restaurant site came on the market which offered water frontage, an asking price of $15 per square foot may still result in a sale because of the unique nature of the property.

Question 337

Substitution:

Answer 337

Substitution: An economic principle that states that a buyer will pay no more for a property than he or she would pay to acquire an equally desirable substitute property.

Question 338

Substitution:

Answer 338

Substitution: An economic principle that states that a buyer will pay no more for a property than he or she would pay to acquire an equally desirable substitute property.

Question 339

Supply analysis:

Answer 339

Supply analysis: Entails examining and analyzing the current competitive properties and their characteristics based on economic, financial, location, as well as site and building size, if appropriate.

Question 340

Supply analysis:

Answer 340

Supply analysis: Entails examining and analyzing the current competitive properties and their characteristics based on economic, financial, location, as well as site and building size, if appropriate.

Question 341

Supply and Demand

Answer 341

Supply and Demand describes the relation of values to the number of goods available [supply] and the goods desired [demand]. In relation to real property, supply is the quantity of a property type available at a certain price. After all, supply of real property is dependent on the agents of production.

Question 342

Supply and Demand:

Answer 342

Supply and Demand: An economic principle describing how values or prices are related to the number of goods made available [supply] and the number of goods people want [demand].

Question 343

Supply and Demand:

Answer 343

Supply and Demand: An economic principle describing how values or prices are related to the number of goods made available [supply] and the number of goods people want [demand].

Question 344

Surplus Productivity

Answer 344

Surplus Productivity is the net income attributed to the land remaining after the costs of labor, capital, and coordination (entrepreneurial profit) have been paid. The surplus or remainder is attributable to the value of the land, and can therefore be used to estimate land value. The principle of surplus productivity is also useful in developing an opinion of the highest and best use of the land and the alternative options that would yield the maximally productive use of the land (i.e., the use that would produce the greatest land value).

Question 345

Surplus Productivity:

Answer 345

Surplus Productivity: An economic principle which states that the net income remaining after the costs of labor, capital, and coordination have been paid is attributable to the land.

Question 346

Surplus Productivity:

Answer 346

Surplus Productivity: An economic principle which states that the net income remaining after the costs of labor, capital, and coordination have been paid is attributable to the land.

Question 347

Systematic Sampling

Answer 347

Systematic sampling results from a methodical technique where every n-th unit is selected. The value of the nth unit will depend on the size of the sample and population.

Question 348

Taxable income:

Answer 348

Taxable income: The amount of income subject to income taxes; found by subtracting the deductions from adjusted gross income such as unreimbursed business expenses, IRA contributions, some capital losses, etc.

Question 349

Tenant:

Answer 349

Tenant: A person who is given permission to possess real estate for a fixed period, typically through a lease agreement; also known as a lessee.

Question 350

The average per capita income is $11,855, while the average household income is $23,776. This information estimates that there is/are ___ income-generating person(s) in each household, and one child. Why is the average household income important? The household income predicts the amount of typical monthly household Why is the monthly household allowance important? The monthly household allowance helps determine if there is a need for the ___________________.

Answer 350

two income-generating persons need for the subject property

Question 351

the empirical rule states ____________________________

Answer 351

the empirical rule states that 68% of the observations will fall within one standard deviation from the mean.

Question 352

Time value of money:

Answer 352

Time value of money: Assumes a positive return on invested funds; a dollar today is worth more than a dollar to be received sometime in the future.

Question 353

Title:

Answer 353

Title: A legal term to describe a bundle of rights in a piece of property in which a party may own a legal interest.

Question 354

Title:

Answer 354

Title: A legal term to describe a bundle of rights in a piece of property in which a party may own a legal interest.

Question 355

Trade fixtures:

Answer 355

Trade fixtures: Equipment attached to real estate used in a trade or business, which can be removed.

Question 356

Transaction costs:

Answer 356

Transaction costs: These costs include financing, commissions, closing costs, title insurance, moving costs, legal fees, land transfer taxes, deed registration fees, etc. Buying and selling real estate is much more expensive than most types of transactions.

Question 357

Transaction costs:

Answer 357

Transaction costs: These costs include financing, commissions, closing costs, title insurance, moving costs, legal fees, land transfer taxes, deed registration fees, etc. Buying and selling real estate is much more expensive than most types of transactions.

Question 358

Transferability

Answer 358

Transferability, or purchasing power, is the number of goods/services that can be purchased with a unit of currency. This power must be greatly considered in the estimation of a property's value, as demonstrated in the next example. Even if utility, scarcity, and desire are satisfied, a property will not be purchased if the target market cannot afford it. Further, purchasing power does not include physical mobility, but rather the control and possession of all the rights of ownership.

Question 359

Transferability, or purchasing power

Answer 359

Transferability, or purchasing power, is the number of goods/services that can be purchased with a unit of currency. This power must be greatly considered in the estimation of a property's value, as demonstrated in the next example. Even if utility, scarcity, and desire are satisfied, a property will not be purchased if the target market cannot afford it. Further, purchasing power does not include physical mobility, but rather the control and possession of all the rights of ownership.

Question 360

Transferability:

Answer 360

Transferability: The ability to purchase, sell, occupy, or dispose of a real estate property in any way desired by the owner.

Question 361

Transferability:

Answer 361

Transferability: The ability to purchase, sell, occupy, or dispose of a real estate property in any way desired by the owner.

Question 362

Unimproved property:

Answer 362

Unimproved property: A vacant parcel of land which does not have any physical buildings

Question 363

Unimproved property:

Answer 363

Unimproved property: A vacant parcel of land which does not have any physical buildings.

Question 364

Units of comparison:

Answer 364

Units of comparison: Relevant features or components of the comparable sales analyzed quantitatively (e.g., price per acre, price per square foot). These components or units of comparison are adjusted to the subject as described in the appraisal report.

Question 365

Utility:

Answer 365

Utility: In economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. In order for a service or good to have value, utility must be present.

Question 366

Utility:

Answer 366

Utility: In economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. In order for a service or good to have value, utility must be present.

Question 367

V

Answer 367

value

Question 368

V B

Answer 368

building value (spoken as "V sub B")

Question 369

V E

Answer 369

equity value (spoken as "V sub E")

Question 370

V L

Answer 370

VL land value (spoken as "V sub L")

Question 371

V M

Answer 371

mortgage value (spoken as "V sub M")

Question 372

V O

Answer 372

overall value (spoken as "V sub O")

Question 373

Vacancy and collection loss: The loss from vacancies and bad debts that is subtracted from potential gross income to arrive at effective gross income.

Answer 373

Vacancy and collection loss: The loss from vacancies and bad debts that is subtracted from potential gross income to arrive at effective gross income.

Question 374

Value

Answer 374

Value is a complex concept. It is not a fact to be found. As opposed to cost and price, which are facts (or estimates of fact) value is an amorphous concept, created in the mind of an individual or market participant. For instance, the value of a particular item is created based on the item's use (utility) and whether it can be exchanged for something of worth such as money or compensation. For the valuation of real property, the market participants include sellers who would like to transfer their property in exchange for compensation, and buyers who wish to acquire the property. By analyzing and interpreting the actions of actual buyers and sellers of similar properties, an appraiser may be able to develop an opinion of what he or she believes the value of an identified piece of real property to be. Value Characteristics Ownership interests, or rights, in real estate are varied, and include fee simple or fee absolute, leased fee, and leasehold interests.1 It is commonly understood that real estate is the land and everything permanently attached thereto, while real property consists of the rights and benefits inherent in the ownership of real estate. The value of real property rights is the focal point of a real estate appraisal. After all, real property value is created when certain economic and legal characteristics coexist, including utility, scarcity, desire, and transferability (purchasing power).

Question 375

Value:

Answer 375

Value: An economic concept which expresses the relationship between a property and its monetary worth at a given time. As it refers to real property appraisal, value is not a fact, but an opinion, and it must be properly defined.

Question 376

Value:

Answer 376

Value: An economic concept which expresses the relationship between a property and its monetary worth at a given time. As it refers to real property appraisal, value is not a fact, but an opinion, and it must be properly defined.

Question 377

What are two other names for the empirical rule?

Answer 377

Answer: 68-95-99.7 the three-sigma rule.

Question 378

What is economic equilibrium of price and quantity?

Answer 378

Economic equilibrium occurs when economic forces are balanced. For example, the quantity demanded is equal to the quantity supplied.

Question 379

What is forced sale/partition?

Answer 379

Forced sales generally occur because owners of property are unable to agree upon certain aspects of the ownership. The owners may disagree on how to use the property, the amount of money to invest into the property, on their right to occupy and use the whole of the property. If the parties cannot come to an agreement, the case moves to court through a petition to partition action. Property may be owned by more than one person either as joint tenants, tenants in common, and in some states tenants by the entirety three kinds of partition which can be awarded by court: partition in kind, partition by allotment, and partition by sale.[3][4] 1. A partition in kind is a division of the property itself among the co-owners. 2. In a partition by allotment, which is not available in all jurisdictions, the court awards full ownership of the land to a single owner or subset of owners, and orders them to pay the person or persons divested of ownership for the interest awarded. 3. Partition by sale constitutes a forced sale of the land, followed by division of the profits thus realized among the tenants. Generally, the court is supposed to order a partition sale only if the land cannot be physically divided, although this determination often rests on whether the economic value of the divided pieces is less in the aggregate than the value of the parcel as a single piece.

Question 380

What is the focal point of a real estate appraisal?

Answer 380

The value of real property rights is the focal point of a real estate appraisal. After all, real property value is created when certain economic and legal characteristics coexist, including utility, scarcity, desire, and transferability (purchasing power). real estate = the land and everything permanently attached thereto real property = rights and benefits inherent in the ownership of real estate.

Question 381

Which is a fact? - Cost - Price - Value

Answer 381

Cost and price are facts (or estimates of fact) Value is a complex concept. It is not a fact to be found. Value is an amorphous concept, created in the mind of an individual or market participant. For instance, the value of a particular item is created based on the item's use (utility) and whether it can be exchanged for something of worth such as money or compensation. For the valuation of real property, the market participants include sellers who would like to transfer their property in exchange for compensation, and buyers who wish to acquire the property. By analyzing and interpreting the actions of actual buyers and sellers of similar properties, an appraiser may be able to develop an opinion of what he or she believes the value of an identified piece of real property to be.

Question 382

Y

Answer 382

yield rate

Question 383

Y E

Answer 383

equity yield rate (spoken as "Y sub E")

Question 384

Y M

Answer 384

mortgage yield rate (spoken as "Y sub M")

Question 385

Y O

Answer 385

overall yield rate (spoken as "Y sub O")

Question 386

Yc = a+bx

Answer 386

Yc = the predicted value of the dependent variable a = the constant (the value where the regression line crosses the Y axis) b = the coefficient or multiplier (independent variable) X = the variable

Question 387

Yield capitalization.

Answer 387

Yield capitalization. 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.

Question 388

Yield rate (Y).

Answer 388

A rate of return on capital, usually expressed as a compound annual percentage rate. A yield rate considers all expected property benefits, including the proceeds from sale at the termination of the investment. Yield rates include the interest rate, discount rate, internal rate of return (IRR), overall yield rate (YO), and equity yield rate (YE).

Question 389

Zoning:

Answer 389

Zoning: Local government regulations to specify use of a property or its site.

Question 390

Zoning:

Answer 390

Zoning: Local government regulations to specify use of a property or its site.

Question 391

Amortization.

Answer 391

The process of retiring a debt or recovering a capital investment, typically through scheduled, systematic repayment of the principal; a program of periodic contributions to a sinking fund or debt retirement fund.

Question 392

Annuity Payable in Advance/Annuity Due.

Answer 392

A type of annuity in which cash flows are paid at the beginning of each period. Also known as an annuity due.

Question 393

Discount rate

Answer 393

A rate of return on capital used to convert future payments or receipts into present value; usually considered to be a synonym for yield rate.

Question 394

Ellwood formula.

Answer 394

A yield capitalization method that provides a formulaic solution for developing a capitalization rate for various combinations of equity yield rates and mortgage terms. The formula is applicable to properties with stable or stabilized income streams, properties with level-equivalent income streams, or properties with income streams expected to change according to the J- or K-factor pattern.

Question 395

Interest

Answer 395

Money paid for, or earned by, the use of capital; a return on capital as distinguished from a return of capital. 2. A property right in land.

Question 396

Inwood factor

Answer 396

A factor that reflects the present worth of $1 (or other unit of currency) per period for a given number of periods, discounted at a given discount rate; obtained by calculation or from standard compound interest tables and used to discount an annuity to present worth; also called Inwood coefficient.

Question 397

Ordinary annuity

Answer 397

A type of annuity in which cash flows are paid at the end of each period; also known as an annuity in arrears.

Question 398

Principal

Answer 398

A capital sum invested; a payment that represents partial or full repayment of the capital loaned or invested, as distinguished from the payment of interest; the unrecovered capital remaining in a loan or investment.

Question 399

Reversion

Answer 399

A lump-sum benefit that an investor receives or expects to receive upon the termination of an investment; also called reversionary benefit.

Question 400

Yield rate (Y)

Answer 400

A rate of return on capital, usually expressed as a compound annual percentage rate. A yield rate considers all expected property benefits, including the proceeds from sale at the termination of the investment.

Question 401

Six functions of a dollar

Answer 401

Time Value of Money (commonly referred to as the six functions of a dollar Time Value of Money (commonly referred to as the six functions of a dollar 1) Future Worth of $1 2) Present Worth of $1 3) Future Worth of $1 Per Period 4) Sinking Fund Factor 5) Present Worth of $1 Per Period 6) Periodic Repayment 1) Future Worth of $1 (Amount to which $1 will grow with compound interest) 2) Present Worth of $1 (Amount to which $1 per period will grow with compound interest - aka $1 deposit each year with 9% interest annually) 3) Future Worth of $1 Per Period (Amount per period which will grow with compound interest to $1 - aka the factors for determining the installments necessary to accumulate a specific sum desired in the future.) 4) Sinking Fund Factor (What $1 due in the future is worth today) 5) Present Worth of $1 Per Period (What $1 payable periodically is worth today) 6) Periodic Repayment (Installment to repay $1 with interest)

Question 402

Contract rent

Answer 402

The actual rental income specified in a lease.

Question 403

Fee simple estate

Answer 403

Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

Question 404

Lease.

Answer 404

Lease. A contract in which the rights to use and occupy land, space, or structures are transferred by the owner to another for a specified period of time in return for a specified rent. See also gross lease; modified gross lease; net lease.

Question 405

Lease interest

Answer 405

Lease interest. One of the real property interests that results from the division of the bundle of rights by a lease; i.e., the leased fee estate or the leasehold estate.

Question 406

Leased fee interest

Answer 406

The ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires.

Question 407

Leasehold interest.

Answer 407

The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease.

Question 408

Market Rent

Answer 408

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).

Question 409

Rent concession.

Answer 409

An inducement for a tenant to lease space, sometimes, but not always, observed in overbuilt markets, which can include above-standard TIs, free rent, moving cost reimbursement or credit, and buyout of the tenant’s existing lease. Concessions are an integral part of the definition of market rent. Also called rent offset.

Question 410

Reversionary Right.

Answer 410

Owner’s right to obtain return of the property rights granted to a tenant upon termination of a lease. The term can also apply to termination of a temporary easement, abandonment of a right of way, extinguishment of a life interest or estate for years, violation of a condition in a deed, or the end of the life of, or abandonment of, improvements.

Question 411

Discounting

Answer 411

A “discount” is a charge that is paid to obtain the right to delay a payment. It is simply the difference between what the payment would be if it were paid in the present and what the payment amount will be if paid in the future. Because the investor can earn a rate of return on money by investing it, the “discount rate” is seen as the same as the rate of return, or yield rate, the investor would receive on invested money. Since the payment is being delayed, the investor loaning it must be compensated for the money that would have been earned during the time period. These earnings are compounded over time because the investor earns a return not only of the principal investment, but also on the earnings from that investment. The discount rate is therefore the rate of growth of the discount, and we treat it as compounding over the time period.

Question 412

J Factors and K Factors:

Answer 412

There are "income adjustment factors" called J Factors and "income stabilization factors" called K Factors, found in Tables of Annual Constants. These are helpful in solving problems with increasing and decreasing income flows.

Question 413

Clauses Concerning Occupancy

Answer 413

In our sample lease, we find references to when the occupancy will commence and end. It also stipulates that uses of the property must be legal and not hazardous. These clauses related to occupancy can be very basic, but can also become quite complicated, and can even impact value of the interests.

Question 414

Competition Clauses:

Answer 414

It is common for leases to include a clause that prohibits the Lessor from leasing another unit in a shopping center or office complex to another tenant in the same type of business. For example: if one bicycle shop is in the center, leasing to another bicycle shop would be prohibited. Should the Lessor violate that provision, it could drastically impact the first bicycle shop owner’s business and the value of that lease to that Lessee.

Question 415

Escalation Clauses:

Answer 415

Escalation Clauses: Most commercial leases contain some sort of escalation clause keyed to actual increases in the Lessor’s costs or, in some cases, tied to some index such as the Consumer Price Index (CPI). Depending on the nature of these escalation provisions, they can in some cases increase rents significantly and the impact on value can fluctuate from very little to quite significant. Sometimes stops or caps are included to set a maximum for a given period, which is something tenants often try to negotiate into the lease agreement.

Question 416

Escape Clauses:

Answer 416

Escape Clauses: Escape clauses allow Lessees to cancel a lease under abnormal conditions, such as provisions in a damages clause that allow the Lessee to cancel the lease if it negatively impacts business operations. That clause also may allow the Lessor a time period in which to cure the adversity and waive rents during the correction period.

Question 417

Kick-out Clauses:

Answer 417

Kick-out Clauses: A kick-out clause allows a Lessee with a long-term lease to cancel that lease if business revenues have not reached a pre-set level after a certain pre-set time frame (e.g., one year, three years); or if an anchor tenant is not replaced; or some other pre-determined trigger tied to the Lessee’s business volume at that particular location. This could weaken the value of a lease interest.

Question 418

Tenant Going Dark:

Answer 418

Many smaller tenants in shopping centers, especially those in smaller complexes where there is just one anchor tenant and six to ten other shops, are concerned that the anchor may close its store and not renew the lease, also known as “going dark.” One remedy is to negotiate a “go dark” clause that allows the Lessee to close its store or receive significant rent reductions if that anchor, or even a specified number of other smaller tenants, go dark.

Question 419

Base rent.

Answer 419

The minimum rent stipulated in a lease.

Question 420

Contract rent.

Answer 420

The actual rental income specified in a lease.

Question 421

Effective rent.

Answer 421

Effective rent. 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.

Question 422

Excess rent.

Answer 422

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.

Question 423

Market rent.

Answer 423

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

Question 424

Overage rent.

Answer 424

The percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume.

Question 425

Percentage rent.

Answer 425

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.

Question 426

Gross Rent Lease

Answer 426

In a gross rent lease the lessor (landlord) pays for all utilities, property taxes, and services associated with the premises. The lessee (tenant) pays only the prescribed rent. This is a very simple type of lease to analyze because the rent is fixed and the only accounting that is required of the appraiser is to determine the total expenses for the facility. Subtracting the expenses from the rent yields cash flow. This is also referred to as a “gross lease”.

Question 427

Subordinated lease

Answer 427

Subordination of lease refers to the tenant's consent to subordinate his or her rights over a property to the rights of the bank holding the mortgage on the property. A subordination of lease agreement is created for this purpose. Another way - In a subordinated ground lease, the landowner offers the land as collateral for the developer's mortgage, giving the landowner a significant stake in the development risk. The subordinated ground lessor is considered a secondary lender with junior rights set behind the primary lender, usually a bank or other financial institution. Another way to explain a subordinated ground lease is as follows: A subordinated ground lease is an agreement by the land owner to allow the tenant's construction lender to have superior rights to the land. In the case of a subordinated lease, the risk is default on the mortgage, rather than default on the lease. This is a significantly riskier position for the lessor. The primary risk is if the lessee defaults on the mortgage loan on the improvements with a subordinated lease, where the improvements are inadequate to pay off the loan. In that circumstance, lessors can find themselves having to bid on a foreclosure sale to ensure ownership of the land that is collateral for the improvements loan. Consistent with that logic, overall cap rates on leased fee interests (the lessor’s interest) for properties with unsubordinated leases are typically lower than for properties with subordinated leases (for the same property type). The risk to the lessor is lower by being in the first position with an unsubordinated lease.

Question 428

Assessed value

Answer 428

Assessed value is the value of a property according to the tax rolls in ad valorem taxation; may be higher or lower than market value, or based on an assessment ratio that is a percentage of market value.

Question 429

Business value

Answer 429

Business value (aka: Going concern value) is the value of intangibles related to an on-going enterprise, such as management ability, workforce, capital, trade names, franchises, patents, trademarks, contracts, leases, operating agreements, etc.

Question 430

Fair value

Answer 430

Fair value is a specific value definition used by accountants as defined by the Financial Accounting Standards Board. Although the term is sometimes used interchangeably with market value, it is not market value as appraisers customarily know market value to be, but rather an accounting terminology.

Question 431

Insurable value

Answer 431

Insurable value is the value of the components of a property that can be insured against loss. Used for insurance purposes, it excludes the value of the land.

Question 432

Investment value

Answer 432

Investment value is the value to a particular investor. It typically involves the investor’s needs, tax bracket, etc.

Question 433

Market value

Answer 433

Market value: We just explored market value and saw that it is about the typical transaction between typical buyers and sellers. Therefore, in attempting to estimate market value of an income property, market rents would best represent the definition.

Question 434

Use Value

Answer 434

Use Value (aka: Value in use) is the value to a specific owner for a specific use.

Question 435

Potential Gross Income

Answer 435

Potential Gross Income (PGI) is the total income that a property possibly could produce at full occupancy, before vacancy and collection losses and operating expenses are deducted. It is usually addressed and analyzed on an annual basis

Question 436

Effective Gross Income

Answer 436

Effective Gross Income (EGI) is the expected income from all operations and sources AFTER vacancy and collection losses have been accounted for and deducted. While the Potential Gross Income was everything a property might get based on 100% occupancy with all other income being maximized, the Effective Gross Income is a more realistic number which, if accurately estimated, will approximate actual received income (i.e., bankable revenue).

Question 437

Net Operating Income

Answer 437

Net Operating Income (NOI) is what remains AFTER all operating expenses have been deducted from the Effective Gross Income. This number, generally expressed in an annual format, represents the investor's profit before paying any debt service related to the investment, and before paying income taxes. Debt service and taxes are individual related issues impacted by FICO scores and federal income tax rates. They are considerations in Investment Value calculations, but also are important considerations in Market Value estimates of income properties. Net Operating Income is the "I" used in Direct Capitalization for dividing by the rate "R" to achieve "Value". _I_ RV

Question 438

Before-Tax Cash Flow (BTCF)

Answer 438

Before-Tax Cash Flow (BTCF) is sometimes referred to as Pre-Tax Cash Flow (PTCF). No matter which label is utilized, it represents one step further in the purification process. It is the net income that remains AFTER debt service is deducted. Although this is an even more purified income number, the actual debt service can vary with the investor. Thus the impact on the value conclusion could be very misleading to an investor with a different debt service. Often, though, this is used when it can be determined that a “type” of investor can obtain financing at a given rate, or when it is common for the particular property type to transfer ownership utilizing seller financing that bears a traditional rate. Of course, the appraiser can research and develop a melded rate for usage, but again, that may not represent actual numbers and could lead to misleading results. Before-Tax Cash Flow is also known as the “equity dividend.”

Question 439

Pre-Tax Cash Flow (PTCF)

Answer 439

Before-Tax Cash Flow (BTCF) is sometimes referred to as Pre-Tax Cash Flow (PTCF). No matter which label is utilized, it represents one step further in the purification process. It is the net income that remains AFTER debt service is deducted. Although this is an even more purified income number, the actual debt service can vary with the investor. Thus the impact on the value conclusion could be very misleading to an investor with a different debt service. Often, though, this is used when it can be determined that a “type” of investor can obtain financing at a given rate, or when it is common for the particular property type to transfer ownership utilizing seller financing that bears a traditional rate. Of course, the appraiser can research and develop a melded rate for usage, but again, that may not represent actual numbers and could lead to misleading results. Before-Tax Cash Flow is also known as the “equity dividend.”

Question 440

After-Tax Cash Flow (ATCF)

Answer 440

After-Tax Cash Flow (ATCF) is another more purified net income that the theoretical investor can actually spend in any manner desired. It is the cash flow that is left after federal income taxes are paid. Because this number is directly dependent upon the individual investor’s tax rate, which is dependent upon that investor’s other income, this number represents the income for usage most predominantly in Investment Value (value to an individual investor), rather than Market Value. Other experts are often consulted in such calculations to be sure the numbers utilized are appropriate for the problem at hand.

Question 441

Class A Buildings (Commercial)

Answer 441

Class A Buildings have excellent locations, superior construction, above average tenants, high rents for their market areas, and superior management. They generally offer amenities such as security, high energy efficiency, etc., and have features such as good views. These are investment grade properties.

Question 442

Class B Buildings (Commercial)

Answer 442

Class B Buildings have locations that are less than excellent. They have lesser quality of construction than Class A, are older, and reflect more depreciation. Management is good, but inferior to Class A. They may have unique features, may even be of historic character, and they have few extras or amenities. Tenants are average in nature.

Question 443

Class C Buildings (Commercial)

Answer 443

Class C Buildings are inferior to Class B. They have the least desirable locations, are even older than Class B, and show significant depreciation. They often lack proximity to desirable traffic areas. Tenants are generally below average; management is typically average or below, and they usually need upgrading of equipment and services. Few or no amenities.

Question 444

Class A,B,C and then Trophy Buildings (Commercial)

Answer 444

Most buildings will fall into one of the above classifications. The one significant exception is Trophy Buildings, which, because they are few and far between, most appraisers will never encounter. These are just what the name implies: the best of the best. With superior locations, construction, and tenants, they often have unique building shapes, designs, and amenities. They have the best management and are extremely well maintained.

Question 445

Investment Grade Tenant

Answer 445

Because the majority of commercial rental properties are not investment grade, owner-occupant considerations often play a major role in determining compatibility. Investment Grade Tenant is defined in The Dictionary of Real Estate Appraisal, Sixth Edition, as “In commercial real estate, any tenant that has an S & P rating of BB- or better or a Moody’s rating of Baa3 or better.” For the same reason (more or less), the Sales Comparison Approach can play a large role in the valuation of some commercial properties because there are adequate numbers of sales that can be used for validation.

Question 446

Vacancy and collection loss:

Answer 446

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.

Question 447

Operating expenses:

Answer 447

Operating expenses "The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming **prudent and competent management**. Note: Debt service, depreciation, and capital improvements are not included in operating expense figures.

Question 448

Three Types of Expenses

Answer 448

**Fixed Expenses** **Variable Expenses** **Replacement Reserves** **Fixed expenses** are constant; they do not vary with occupancy. **Variable expenses** often change in accordance with occupancy. **Replacement reserves** exist because of the need to plan ahead for major costs. You might think of them as an amortization of the expenses for big items like roofs, painting, paving, etc. over their expected lives.

Question 449

Band of investment technique:

Answer 449

A method of estimating either overall capitalization rates or overall discount rates by calculating the weighted average of capitalization or discount rates for various components that make up a total property investment. See also debt coverage ratio formula, direct capitalization, discount rate, income capitalization approach, overall capitalization rate (RO).

Question 450

Leverage:

Answer 450

Leverage: The use of borrowed funds, which may increase or decrease the yield that would otherwise be realized on an equity investment when there is no debt financing. Leverage can be analyzed using capitalization rates or yield rates

Question 451

"Entrepreneurial profit:

Answer 451

"Entrepreneurial profit: A market-derived figure that represents the amount an entrepreneur receives for his or her contribution to a project and risk; the difference between the total cost of a property (cost of development) and its market value (property value after completion), which represents the entrepreneur’s compensation for the risk and expertise associated with development. An entrepreneur is motivated by the prospect of future value enhancement (i.e., the entrepreneurial incentive). An entrepreneur who successfully creates value through new development, expansion, renovation, or an innovative change of use is rewarded by entrepreneurial profit. Entrepreneurs may also fail and suffer losses.”

Question 452

DISCOUNTED CASH FLOW (DCF):

Answer 452

DISCOUNTED CASH FLOW (DCF): An appraisal technique that analyzes an income property by discounting the estimated future cash flow, using a rate of return which the appraiser estimates is required to attract an investor to the type of investment being appraised. See Discount Rate.”

Question 453

Terminal capitalization rate.

Answer 453

** The terminal capitalization rate is used to convert the Net Operating Income at the end of the holding period into a projected sale value.** Terminal capitalization rate. The capitalization rate applied to the expected net income for the year immediately following the end of the projection period to derive the prospective resale price or value of a property. Also called a going-out, residual, or reversionary capitalization rate.” Calculated by dividing the projected net operating income (NOI) for the year of sale by the selected rate. Sometimes the projected NOI for the year after the sale is used because this is the NOI that the buyer will receive for the first year. The terminal capitalization rate is typically forecast to be a higher than going-in cap rate due to a higher risk associated with estimating NOI at the time of the sale. For example, suppose an investor wants to estimate the resale price, assuming the property will be sold in year 10. NOI for year 11 is estimated to be $150,000. Current capitalization rates for similar properties are about 10 percent. The appraiser adds a risk premium of 50 basis points to obtain a terminal capitalization rate of 10.5 percent. Thus the estimated resale price is $150,000 ÷ 0.105 = $1,428,571."

Question 454

Yield capitalization.

Answer 454

“Yield capitalization. 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.”

Question 455

Capitalization rate (RO) vs yield rate (YO)

Answer 455

Overall capitalization rate (RO) differs from the overall yield rate (YO) a. Overall capitalization rate does not explicitly account for the impact of changes in income and property value on the yield rate earned over the entire investment-holding period. b. Overall yield rates can be higher or lower than overall capitalization rates because of the change in income and property value.

Question 456

General Formula for Overall Capitalization Rate

Answer 456

RO = YO – ΔO * a RO is the overall capitalization rate YO is the overall yield rate ΔO is the total percentage change in the overall value during the holding period a is the annualizer

Question 457

what is Ellwood Formula also called

Answer 457

mortgage-equity formula

Question 458

Ellwood formula.

Answer 458

Ellwood formula. A yield capitalization method that provides a formulaic solution for developing a capitalization rate for various combinations of equity yield rates and mortgage terms. The formula is applicable to properties with stable or stabilized income streams, properties with level-equivalent income streams, or properties with income streams expected to change according to the J- or K-factor pattern.

Question 459

Hoskold premise.

Answer 459

Hoskold premise. The concept that the present value of an income stream is based on a combination of two separate rates: a speculative rate for risk and a safe rate for the sinking fund. The Hoskold premise applies to income in the form of an ordinary level annuity of limited duration that is sufficient to pay a fair return on capital at the speculative rate and to contribute necessary installments to a sinking fund. This sinking fund will grow with interest at a safe rate and repay the investor in full at the termination of the investment.”

Question 460

"Inwood premise.

Answer 460

"Inwood premise. The concept that the present value of an income stream is based on a single discount rate; applies to income in the form of an ordinary level annuity.”

Question 461

The scope of work is acceptable when it meets or exceeds:

Answer 461

The scope of work is acceptable when it meets or exceeds: 1) the expectations of parties who are regularly intended users for similar assignments; and 2) what an appraiser’s peers’ actions would be in performing the same or a similar assignment.”

Question 462

“Terminal capitalization rate.

Answer 462

An overall capitalization rate used to forecast a reversionary value in a discounted cash flow analysis. Calculated by dividing the projected net operating income (NOI) for the year of the sale by the projected rate. Sometimes the projected NOI for the year after the sale is used because this is the NOI that the buyer will receive for the first year. The terminal capitalization rate is typically forecast to be higher than the going-in cap rate due to a higher risk associated with estimating the NOI at the time of the sale

Question 463

Yield rate (Y)

Answer 463

Yield rate (Y). A rate of return on capital, usually expressed as a compound annual percentage rate. A yield rate considers all expected property benefits, *including the proceeds from sale at the termination of the investment*.”

Question 464

Yield rate (Y):

Answer 464

Yield rate (Y): The return on an investment, which considers income received over time; the discount rate that equates the present value of future cash flows with the initial investment. **Same as internal rate of return.**

Question 465

“Modified internal rate of return (MIRR).

Answer 465

“Modified internal rate of return (MIRR). A measure of investment performance; similar to the internal rate of return except that negative cash flows, if any, are discounted to present value at a specified safe rate and positive cash flows are presumed to be reinvested to grow with compound interest at either the same specified safe rate or at a specified market rate until the termination of the investment; also called **adjusted internal rate of return**.

Question 466

Overall yield rate (YO).

Answer 466

Overall yield rate (YO). The discount rate that equates the present value of the net operating income (NOI) and resale proceeds with the purchase price. Sometimes referred to as a free and clear yield because the overall yield rate does not consider financing.

Question 467

Equity yield rate (YE):

Answer 467

Equity yield rate (YE): A rate of return on the equity capital; the equity investor's Internal Rate of Return based on expected before-tax cash flows and the investor's original equity; used as the discount rate in a discounted cash flow analysis to estimate the present value of the before-tax cash flows (from operation and resale) to arrive at a value estimate for the equity. The equity yield rate reflects the effect of financing on the investor's rate of return. "After-tax equity yield rate: The annualized rate of return that discounts all expected after-tax cash flows (from operations and resale) to a present value equal to the original equity investment in the property. It represents the internal rate of return on equity after taxes. "Before-tax equity yield rate: The annualized rate of return that discounts all expected before-tax cash flows (either from operations or at resale to a present value equal to the original equity investment in the property. It represents the internal rate of return on equity before taxes.

Question 468

"Net present value (NPV).

Answer 468

"Net present value (NPV). The difference between the present value of all expected investment benefits (PV) and the present value of the capital outlays (CO), i.e., NPV = PV – CO.” "NET PRESENT VALUE (NPV) Used to rate the quality of an investment. It is the difference between the total cost of an investment and the present worth of all future anticipated benefits of ownership."

Question 469

The Profitability Index (PI)

Answer 469

The Profitability Index (PI) measures the ratio between the present value of future cash flows and the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment. Finding a profitability index greater than 1 shows a profitable investment. An index of less than 1 fails to reach the intended investment goal. One equaling 1 is considered acceptable, nothing more and nothing less.

Question 470

Payback period:

Answer 470

Payback period: The number of years required for cumulative income from an investment to equal the amount initially invested. The payback period does not consider the time value of money, and therefore is not a discounted cash flow analysis technique

Question 471

Forecasting or Predicting

Answer 471

Forecasting or Predicting The yield capitalization process for discounted cash flow analysis depends on accurate forecasting or predicting of future numbers. As we already have addressed in this course, it is best based on **what the market thinks or predicts**, rather than on mathematical calculations based on historic events and revenues. The appraiser does need to have an understanding of the past actions of market participants, though. In fact, forecasting depends on assimilating the past to enhance the reliability of predictions of future market interests and desires.

Question 472

Remainder Interest

Answer 472

“Remainder Interest. A future possessory interest in property that is given to a third party and matures upon the termination of a limited or determinable fee. For example, A gives B a life estate in A’s farm for B’s lifetime. A also gives C an interest in the farm to take effect upon B’s death. C has a remainder interest.” “Remainderman. A person or entity entitled to an estate after a prior estate or interest has expired. See also remainder interest.”

Question 473

Easement.

Answer 473

The right to use another’s land for a stated purpose.”

Question 474

Easement appurtenant.

Answer 474

An easement that is attached to, benefits, and passes with the transfer of the dominant estate; runs with the land for the benefit of the dominant estate and continues to burden the servient estate, although such an estate may be transferred to new owners.”

Question 475

“Easement by prescription.

Answer 475

The right to use another’s land, which is established by exercising this right openly, hostilely, and continuously over a statutory period of time.”

Question 476

Easement in gross.

Answer 476

An easement that benefits a legal person or entity (individual, corporation, partnership, LLC, government entity, etc.) and not a particular tract of land; an easement having a servient estate but no dominant estate.”

Question 477

The “servient estate”

Answer 477

The “servient estate” is the owner of the property’s estate upon which the easement exists.

Question 478

The “dominant estate”

Answer 478

The “dominant estate” is the one that has the easement to use another’s property.

Question 479

Buying power index (BPI).

Answer 479

Buying power index (BPI). A measure of demand in a local area relative to a benchmark value. One such index, the Survey of Buying Power (BPI), uses the United States as a benchmark in the following formulation:

Question 480

Capital gain

Answer 480

Capital gain. The taxable profit derived from the sale of a capital asset. Equals the sales price minus the total of sales costs and the adjusted basis, where the adjusted basis equals the original cost plus capital additions minus accumulated depreciation.

Question 481

“J factor.

Answer 481

“J factor. A constant used to transform a variable income stream into its level equivalent annuity based on the equity yield rate. A way to stabilize income. The J factor represents a change in net operating income (NOI) over a specified holding period with the pattern of change reflecting the change in a sinking fund based on growth determined by the equity yield rate.

Question 482

K factor.

Answer 482

K factor. A factor that can be used to convert a stream of income that changes at a constant ratio (compound rate) into a level payment equivalent. A way of stabilizing income. Sometimes used in conjunction with the Ellwood formula.