HP12C

Question 1

How do you do weighted average on HP12C?

Answer 1

$1000 [ENTER] 50 [Σ+] (aka 50%)
$900 [Enter] 40 [Σ+] (aka 40%)
$1200 [Enter] 10 [Σ+] (aka 10%)

[g blue] - [6] (xw - average weighted)

Result $980

Question 2

How to do linear regression on HP12C?

Example:

Estimate a projected sales price of a 1,550-square-foot property where comparable sales provide the following information:

Sale Price Square Feet
#1 $58,000 1,300
#2 $65,000 1,475
#3 $72,000 1,600

Answer 2

58,000 [ENTER] 1,300 [Σ+]
65,000 [ENTER] 1,475 [Σ+]
72,000 [ENTER] 1,600 [Σ+]

1,550 blue [g] [2] y,r

Indicated value of subject is: $69,238.53

Question 3

How many days are between June 3, 2005 and October 16, 2006?

Answer 3

Be sure that your HP12C is set to the correct sequence of data entry blue [g] [5]

6.032005 [ENTER]
10.162006 [ g ] [ DYS] (that one’s in the middle, in blue under [EEX])

Answer on the Display is: 500

Question 4

What date would be 150 days from June 15, 2007?

Answer 4

Be sure that your HP12C is set to the correct sequence of data entry blue [g] [5]

6.152007 [ENTER]
150 [ g ] [DATE] (that one is on the bottom of [CHS] in blue)

The answer on the display is: 11,12,2007 1

That is November (11th month), 12th day of 2007, and 1 means it’s the first day of the week and/or a Monday.

Question 5

If income from a property rises 6% per annum, what will the income be next year if it was $45,000 this year?

Answer 5

45,000 [ENTER]

6 [%] [ + ]

47,700 = 6% more than 45,000

Note: for % less press the [ - ] instead of the [ + ].

Question 6

What is the percentage of increase from $220,000 to $242,000?

Answer 6

220,000 [ENTER]

242,000 [∆%]

10.00 = the percentage of increase is 10%

Note: for % of decrease, enter the higher number followed by the lower.

Question 7

The number 8,000 is what percentage of 32,000?

Answer 7

32,000 [ENTER]

8,000 [%T]

25.00 means that 8,000 is 25% of 32,000.

Question 8

Using the numbers 100, 103, 105, 106, and 108, calculate the standard deviation and mean

Answer 8

100 [Σ+]
103 [Σ+]
105 [Σ+]
106 [Σ+]
108 [Σ+]

blue [g] [.] (s) - standard deviation
blue [g] [0] (x) - mean

Question 9

The Six Functions of a Dollar on HP
- 5 top left buttons

Answer 9

n is the number of periods. This is the time factor.
i is the interest rate
PV stands for Present Value
PMT is the payment
FV is Future Value

Question 10

Create the amortization schedule for the first three payments on the $100,000 loan for 30 years. 10% interes

Answer 10

Payment——-Balance——-Interest——–Principal
—1————–$100,000—–$10,000.00—–$607.92
—2————–$99,392.08—-$9,939.21—–$668.71
—3————–$99,872.34—-$9,872.34—–$735.58

Question 11

How much will we pay in interest the first year for a 30-year (monthly payments) mortgage of $182,000 at a 6.2% interest rate.

Answer 11

First, we need to find the monthly payment:
f CLEAR FIN
30 [g] [n]
6.2 [g] [i]
182000 [PV]
[PMT]

You should have gotten - $1,114.69

12 [f ] [AMORT] = -11,223.50 (Interest for year 1)

[x><y] = - 2,152.78 (Principal for year 1)

[RCL] [PV] = 179,847.22 (Remaining Balance)

[RCL] [n] = 12.00 (Number of payments)

If you want to continue you can just go ahead with the next year.

12 [f ] [AMORT] = -11,086.18 (Interest for 2nd year)

[x><y] = - 2,290.10 (Principal for 2nd year)

[RCL] [PV] = 177,557.12 (Remaining Balance)

[RCL] [n] = 24.00 (Number of payments)

Question 12

You have a mortgage of $112,500 written for 25 years at 7.2% annually (monthly payments). However, there will be a balloon payment due at the end of year five. How much will that be (the amount of the remaining balance of the loan at that point)?

Answer 12

[f] [CLEAR] [FIN]
25 [g] [n]
7.2 [g] [i]
112500 [CHS] [PV]
[PMT] = 809.54

Then we leave all the information in the rest of the registers, but change the entry in the n register to five years and ask for the future value after five years.

5 [g] [n]
[FV] = 102,818.06

Therefore, the remaining balance at the end of five years of the 25-year scheduled payout, to be paid off as a lump sum balloon payment, would be $102,818.06.

Question 13

An office is leased for a three year period at $3,000 per month, payable at the beginning of each month. Market rent is $4,000 per month. The estimated market interest rate is 5%. Calculate the present value.

Answer 13

[ g ] [BEG] (remember the problem said rents paid in advance, so you need to change from END to BEG)

3 [ g ] [ n ] (monthly rent, so just like the monthly mortgage payments = [ g ] needed)
5 [ g ] [ i ]
1,000 [CHS] [PMT]
[PV]
Display reads: $33,504.73

Question 14

A small, single-tenant, freestanding office building rents for $2,500 per month, payable in advance each month. Your research concludes that the Market Rent for this unit would be $3,500 for the full three-year term of the lease. Additional research indicates that the market rate for leasehold investments is 9%. What is the present value of the leasehold interest?

Answer 14

Market Rent: $3,500

Contract Rent: $2,500

It is easy to see that the leasehold interest is $1,000 better off each month. This raises the question:

What is the present value of $1,000 per month for three years at a rate of 9%?

Remember, there are two special things we have to do in this problem:

Put “BEGIN” in the Display; and
Remember to use the blue [ g ] key to change payments to “monthly” as we did when calculating monthly mortgage payments.
First, clear the calculator: [ f ] [REG]. Now press the blue [ g ] key and then the [BEG], (the word “Begin” should be in the Display). Then key in 3 (for the number of years) and then the blue [ g ] key (for monthly intervals). Next press the [ 9 ] key, followed by the blue [ g ] key again (to make it monthly) and then press [ i ]. The calculator is now ready for the money to be entered.

Key in $1,000 (the monthly advantage of the lessee), then the [CHS] and the [PMT]. Since that is the cash flow, it is viewed a payment. To solve for the present value, press [PV].

Let’s look at just the keystrokes:

[ g ] [BEG]
3 [ g ] [ n ]
9 [ g ] [ i ]
1,000 [CHS] [PMT]
[PV]
Display reads: 31,682.66

The value of the Leasehold is $31,682.66

If you did not get the same answer, go back and try it again until you do.

What if the contract rent is greater than market rent? In such cases the Leasehold has no advantage, so it could actually have a negative value.

Question 15

What is the present value of $1,500 per year for 12 years at 15%, with the rent payable at the end of each period?

Answer 15

This time we have to start with the calculator in the “END” mode, so press the blue [ g ] key and then the [END].

As always, clear the calculator: [ f ] [REG]

Now you’re ready!

12 [ n ]
15 [ i ]
1,500 [CHS] [PMT]
[PV]
Display reads: $8,130.93

Question 16

A property is leased at a rent of $20,000 per year (payable at the end of each period) for five years. At the termination of the lease, the property is anticipated to be sold for $300,000. What is the value of the leased fee interest if the market derived rate is 10%?

Answer 16

-Clear the calculator.
-Make sure “Begin” is not in the Display.

5 [ n ]
10 [ i ]
20,000 [CHS] [PMT]
300,000 [CHS] [FV]
[PV]
Display reads: 262,092.13

Question 17

A property is leased for five years. The annual rent starts at $20,000 (payable at the end of each rental period) and increases $1,000 per year. This is the forecasted rent for the entire lease period. The market derived rate for this property is 10%. The value of the reversion at the end of the lease is $250,000. What is the value of the leased fee?

Answer 17

This one looks scarier than it really is. There are just more keystrokes involved because you have to key in each year’s new rent to account for the changes in that category. We have two new keys involved, but they really aren’t totally new. [CFj] or cash flow “j” and the [NPV] or net present value keys are alternative functions of the [PMT] key and the [PV] key.

-Clear the calculator.
-Make sure “Begin” is not in the Display.

20,000 [ g ] [CFj] (Don’t get excited…[CFj] is on the bottom of the [PMT] key.)
21,000 [ g ] [CFj]
22,000 [ g ] [CFj]
23,000 [ g ] [CFj]
274,000[ g ] [CFj] (This is the 5th year’s rent plus the reversion or resale.)
10 [ i ]
[ f ] [NPV] ([NPV] is above the [PV]…that’s why we pressed the [ f ].)
Display reads: 237,907.87

The value of the leased fee interest (present value of the cash flows plus the present value of the reversion) is $237,907.87.

Question 18

The first tenant is a convenience store that pays $2,000 per month. The second is a coin laundry that pays $1,500 per month. The third tenant is a shoe repair shop that pays $500 per month for a small alcove. The fourth tenant is a real estate broker’s office paying $1,000 per month. For the purposes of this case study, assume that all leases are true Net Leases (NNN) where the tenants pay all operating expenses including property management fees so these rents represent the true “Net Income” on each lease.

The investor contacts you to perform an appraisal to estimate the value of a potential leased fee interest in the property. You have experience in performing this type of assignment in this market area, and agree to do it. An engagement letter is signed by both parties, and your task begins.

Through extensive research you find, after weighing capital investment, risk, liquidity, and other factors, the market rate for such investments is 9%. You also perform a prospective value estimate on the real property, based on research with investors and experts in the field, and believe the value of this property at the end of the five years will be $650,000.

Calculated the value of the leased fee interest. Remember, when using income capitalization methodology you use annual income and expenses not monthly in your calculation.

Answer 18

The keystrokes on the HP12C calculator to reach this solution are:

First clear the financial memory by these keystrokes: f [FIN]

Enter the number of periods: 5 [n]

Enter the rate of return: 9 [i]

Enter the annual cash flow by multiplying the monthly net income by 12 then entering it: 5000 ENTER 12 X [CHS] [PMT]

Enter the sale reversion at the end of five years: 650,000 [CHS] [FV]

Request the unknown Present Value: [PV]

The answer to the Chapter 10 case study is $655,834.48.

Question 19

If the market rents show the convenience store rental should be $3,000 per month rather than the $2,000 contracted for the full 5 year term of the lease, and you use the same 9% rate, what is the value of the convenience store’s leasehold calculated on the monthly difference (assuming payments at the end of the month)?

Answer 19

If the market rents show the convenience store rental should be $3,000 per month rather than the $2,000 contracted for the full 5 year term of the lease, and you use the same 9% rate, what is the value of the convenience store’s leasehold calculated on the monthly difference (assuming payments at the end of the month)?
$48,173.37
Leasehold Interest. f [FIN] 5 g [n] 9 [i] 1,000 [CHS] [PMT] [PV]

Question 20

A property can be purchased with a 70 percent loan. The loan would have a 20-year term with monthly payments at 8 percent interest. The indicated mortgage capitalization rate is 0.1004. This particular lender is requiring a 1.3 debt coverage ratio. What is the indicated overall rate (RO) based on this information?

Answer 20

9.14%

1.3 ENTER .1004 [X] .70 [X]

Question 21

A property is purchased for $100,000 and produces cash flows of $10,000 for five years, at which time it is sold for $110,000. Calculate the internal rate of return.

Answer 21

For example, a property is purchased for $100,000 and produces cash flows of $10,000 for five years, at which time it is sold for $110,000. The internal rate of return can be calculated as follows using your HP12C financial calculator:

100000 [CHS] [CFo] (you need a negative number to begin with to express the outflow of cash in the purchase - the CFo is under the PV key)

10000 [g] [CFj] (the income is express as positive - the CFj key is under the PMT key)

4 [g] [Nj] (this is the number of cash flows in years BEFORE the final year)

10000 [ENTER] 110000 + (This adds the final year cash flow to the sale proceeds also received at the end of that final year)

[g] [CFj] (This enters both the final year cash flow and the sale proceeds into the series of cash flows, since it happens only once you do not need the Nj entry)

[f] [IRR] (The IRR key is in gold over the FV key)

After flashing for a while your display should show 11.59 which is the Internal Rate of Return

Question 22

You want to know the Internal Rate of Return on an investment in an income producing property that was originally purchased for $500,000. Assume an annual cash flow of $35,000 during the entire five-year holding period. The property is sold at the end of the holding period for $650,000.

Answer 22

You want to know the Internal Rate of Return on an investment in an income producing property that was originally purchased for $500,000. Assume an annual cash flow of $35,000 during the entire five-year holding period. The property is sold at the end of the holding period for $650,000.

Here are your keystrokes:

5 [ n ]
500,000 [CHS] [PV]
35,000 [PMT]
650,000 [FV]
[ i ]
Display reads: 11.75

The Internal Rate of Return is 11.75%

Question 23

Calculate the Internal Rate of Return on an investment property with an original purchase price of $400,000. Assume the first year’s cash flow is $30,000, but in this case it will increase by 3% annually for a five-year holding period. The property will be sold at the end of the holding period for a price of $500,000.

Answer 23

Keystrokes are as follows:

400,000 [CHS] [g][CFo]
(Note: CFo is a new key for us on bottom of PV)

30,000 [ g ] [CFj] (Note: CFj is a new key for us on bottom of PMT)
30,900 [ g ] [CFj] (Note: second year is 3% more than first year)
31,827 [ g ] [CFj] (Note: + 3%)
32,782 [ g ] [CFj] (Note: + 3%)
533,765 [ g ] [CFj] (Note: + 3% last year’s cash flow plus reversion)
[ f ] [IRR] (Note: IRR is a new key for us above the FV)

Display reads: 11.86

The internal rate of return is 11.86%

Question 25

Estimate the value of a life interest in a property with a present market value of $300,000. The life tenant’s life expectancy is 12 years, based on a life expectancy actuarial table. The market interest rate for this property is estimated to be 10%. The estimated value of the property at the end of the life tenancy (12 years) is estimated to be $500,000.

Answer 25

12 [ n ]
10 [ i ]
500,000 [CHS] [FV]
[PV]
Display reads: 159,315.41 (present value of the future value)

Then subtract:300,000.00
-159,315.41
140,684.59 Value of the Life Interest

Question 26

Sandwich Lease
When a property is subleased, a sublease receives the rights and obligations of the lease from the prior lessee. We should look at a definition of this “sandwich leasehold estate.”

The Language of Real Estate Appraisal…Second Edition defines it as:

“Sandwich leasehold estate: An estate that arises from a sandwich lease. The value of the sandwich leasehold can be estimated as the present value of the difference between the income from the sublease and the income from the lease. See also fee simple estate, leased fee estate, leasehold estate, subleasehold estate.

For example, suppose a property is currently leased at a below-market rate of $400,000 per year. The lessee then subleases the property for the next five years at $500,000 (flat rental with a net lease). Assume a discount rate of 15 percent. The value of the sandwich leasehold can be estimated as follows:

Answer 26

Discounting at 15%, $100,000 x an (15%, 5 yrs.) = $335,215…”

[SIDE NOTE]

With your HP-12C you could do the following keystrokes:

5 [ n]
15 [ i ]
100,000 [CHS] [PMT]
[PV]
Display reads: 335,215.51

Question 27

Sandwich Lease
When a property is subleased, a sublease receives the rights and obligations of the lease from the prior lessee. We should look at a definition of this “sandwich leasehold estate.”

The Language of Real Estate Appraisal…Second Edition defines it as:

“Sandwich leasehold estate: An estate that arises from a sandwich lease. The value of the sandwich leasehold can be estimated as the present value of the difference between the income from the sublease and the income from the lease. See also fee simple estate, leased fee estate, leasehold estate, subleasehold estate.

For example, suppose a property is currently leased at a below-market rate of $400,000 per year. The lessee then subleases the property for the next five years at $500,000 (flat rental with a net lease). Assume a discount rate of 15 percent. The value of the sandwich leasehold can be estimated as follows:

Answer 27

Discounting at 15%, $100,000 x an (15%, 5 yrs.) = $335,215…”

[SIDE NOTE]

With your HP-12C you could do the following keystrokes:

5 [ n]
15 [ i ]
100,000 [CHS] [PMT]
[PV]
Display reads: 335,215.51

Question 28

Continuing with the Sandwich Lease Definition
“.Assume that the market rate is $500,000 in year 1 and increases by 3 percent per year. Discount rate 18%

Sandwich lease is flat $500,000. For 5 years

Answer 28

Year 1 2 3 4 5
500,000 515,000 530,450 546,364 562,754
500,000 500,000 500,000 500,000 500,000
0 15,000 30,450 46,364 62,754

Discounting at 18 percent (a higher discount rate is used to adjust for risk; the subleasehold estate is riskier than the sandwich leasehold), the value of the leasehold estate equals

V = (15,000 ÷ 1.18)2 + (30,450 ÷ 1.18)3 + (46,364 ÷ 1.18)4 + (62,754 ÷ 1.18)5
V = 80,650

If we assume that it is reasonable to sum the values of the sandwich leasehold and the subleasehold to find the value of the leasehold, the value of the leasehold can now be calculated as $335,215 + 80,650 = $415,865. The leasehold value may not be equal to the subleasehold value plus the sandwich leasehold, depending on the relationship between the discount rates applicable for each interest.”

[SIDE NOTE]
On your HP-12C, do the following keystrokes:
Step One: 0 [ g ] [CFj]
15,000 [ g ] [CFj]
30,450 [ g ] [CFj]
46,364 [ g ] [CFj]
62,754 [ g ] [CFj]
18 [ i ]
[ f ] [NPV]

Display reads: 80,649.96 or 80,650 (rounded)

Question 29

Calculate the floor area ratio on a 150,000 square foot warehouse situated on 10 acres of land.

Answer 29

.34

Question 30

An anchor tenant moves out of a shopping center. Because that vacancy results in lower sales volume in the retail center, one of the remaining stores in the center is now producing rent (overage and minimum rent combined) of $15,000. Comparable nearby fully leased spaces in a center without a similar anchor vacancy indicate that it should produce overage and minimum rent of $20,000 if the center had a new anchor tenant. Assume a cap rate of 11% and assume that the external obsolescence attributable to the building is 60%. What is the dollar amount of external obsolescence attributable to the building?

Answer 30

HP12C keystrokes – 5000 [ENTER] .11 [÷] .6 [x]
$27,723

Question 31

In comparing an investment opportunity to the return from an annuity, an appraiser calculates the return on the annuity. The initial deposit into the annuity is $5,000, and there will be annual deposits of the same amount for 8 years on the anniversary of the first deposit. If the interest rate is 5% compounded annually, what would be the balance at the end of the eight years?

Answer 31

Don’t forget to set the HP12C to the “BEG” function (blue key under the “7” key) then set it back to “END” when you are finished.

 [g] [BEG]
 8[n]
 5[i]
 5,000 [CHS] [PMT]
 [FV]
 display reads: 50,132.81

Question 32

An appraiser is attempting to project Replacement Reserves for a retail center. Research indicates that it will cost $90,000 to paint the exterior and that it will need to be done in 6 years. If the funds can be deposited into an account paying 5% interest, how much would have to be deposited each month to have sufficient funds to paint the building at the end of the time allotted?

Answer 32

Don’t forget to set the HP12C to the “BEG” function (blue key under the “7” key) then set it back to “END” when you are finished.

Deposit:

   [g] [BEG]
   6 [ g ] [ n ]
   5 [ g ] [ i ]
   90,000 [CHS] [FV]
   [PMT]
   Display reads: 1,069.99

Question 33

What is the present value of a cash flow of $45,000 per year at 8% for 7 years?

Answer 33

7 [ n ]
8 [ i ]
45,000 [CHS] [PMT]
[PV]
Display reads: 234,286.65

Question 34

An appraiser completes all three approaches to value on an office building. The indicated value in the Sales Comparison Approach is $850,000, but the comparables used were not strongly compatible with the subject property, and were in different market areas. As a result, the appraiser decides that the Sales Comparison Approach should only be given 20% weight in the final reconciliation.

In contrast, the Income Approach data was deemed to be current and reflective of the current market. Interviews with market participants provided consistent indicators, and the appraiser determines that this approach should be given the greatest weight, and allocates 70% to the Income Approach, which came in at $890,000.

The Cost Approach of $835,000, although supportive of the Sales Comparison Approach, is only given the remaining weight. This is due to the building being located in a dense urban area with little prospect for building an alternative without tearing down improvements to an already improved site (which adds greatly to the development costs), and also due to the fact that the market is just not doing such at this time, in this area.

Utilizing the weighted mean technique on your HP-12C financial calculator, what is the indicated reconciled value of the office building?

Answer 34

850,000 [ENTER]

.20 [Sum+ ]

890,000 [ENTER]

.70 [Sum+ ]

835,000 [ENTER]

.10 [Sum+ ]

[ g ] [ xw ]

Display reads: 876,500

Question 35

An office space in a large office building is leased for a four-year period at $4,000 per month (payable in advance). Market rent would be $5,000 per month. The estimated market interest rate is 6%. Calculate the present value of the leasehold interest.

Answer 35

Market Rent $5,000
Contract Rent -$4,000
Advantage $1,000

Compute the present value of $1,000 per month for 48 months at 6%.

[ g ] [BEG] (Remember, the problem said rents paid in advance)
4 [ g ] [ n ] (Monthly rent, so just like the monthly mortgage payments = [ g ] needed)
6 [ g ] [ i ]
1,000 [CHS] [PMT]
[PV]
Display reads: 42,793.22

Note: Don’t forget to remove “Begin” from the window…[ g ] [END]

Question 36

A single-tenant investment property is leased for five years. The annual rent starts at $20,000 and increases by $1,000 each year. (Due to economic times, the owner has agreed to the lease payments being payable at the end of each rental period rather than in advance.) This is the forecasted rent schedule for the entire lease period. The market derived rate for this property is 10%. The value of the reversion at the end of the lease is $250,000. What is the value of the leased fee?

Answer 36

20,000 [ g ] [CFj] (Remember, [CFj] is on the bottom of the [PMT] key.)
21,000 [ g ] [CFj]
22,000 [ g ] [CFj]
23,000 [ g ] [CFj]
274,000 [ g ] [CFj] (This is the 5th year’s rent plus the reversion or resale.)
10 [ i ]
[ f ] [NPV] ([NPV] is above the [PV]…that’s why you press the [ f ].)
Display reads: 257,907.87

The value of the leased fee interest (present value of the cash flows plus the present value of the reversion) is $257,907.87.

Question 37

An investor is exploring several investment opportunities. There is a new construction strip center with four tenants who have already signed leases and who will take occupancy next month. All four leases call for the rent to be paid at the end of each month, and all four run for five years, expiring on the same date.

The first tenant is a convenience store that pays $2,000 per month. The second is a coin laundry that pays $1,500 per month. The third tenant is a shoe repair shop that pays $500 for a small alcove. The fourth tenant is a real estate broker’s office paying $1,000 per month. The leases are all true NNN Leases where the tenant’s reimburse the landlord for all operating expenses on the property except the owner’s internal bookkeeping expense. Thus these rents reflect the effective Net Operating Income.

The investor contacts an appraiser to perform an appraisal to estimate the value of a potential leased fee interest in the property. An engagement letter is signed by both parties.

Through extensive research, the appraiser finds that after weighing capital investment, risk, liquidity, and other factors, the market rate for such investments would be 9%. The appraiser also performs a prospective value estimate on the real property, based on research with investors and experts in the field, and believes the resale of this property at the end of the five years will be $650,000.

Calculated on an annual income basis, what is the value of the leased fee interest?

Answer 37

5 [ n ]
9 [ i ]
60,000 [CHS] [PMT]
650,000 [CHS] [FV]
[PV]
Display reads: 655,834.48

Question 38

A property sold for $760,000 and has the following reconstructed operating income statement summary:

PGI $240,000
V&C/L (4%) -9,600
EGI 230,400
OE -138,200
NOI 92,200

What is the Operating Expense Ratio? ________________________

What is the Net Income Ratio? ______________________

Answer 38

Operating Expense Ratio:
138,200 ÷ 230,400 = .60

Net Income Ratio:
92,200 ÷ 230,400 = .40

Question 39

A property sold for $760,000 and has the following reconstructed operating income statement summary:

PGI $240,000
V&C/L (4%) -9,600
EGI 230,400
OE -138,200
NOI 92,200

What is the Potential Gross Income Multiplier? ________________________

What is the Effective Gross Income Multiplier? ________________________

Answer 39

Potential Gross Income Multiplier:
760,000 ÷ 240,000 = 3.167

Effective Gross Income Multiplier:
760,000 ÷ 230,400 = 3.299

Question 40

A property sold for $760,000 and has the following reconstructed operating income statement summary:

PGI $240,000
V&C/L (4%) -9,600
EGI 230,400
OE -138,200
NOI 92,200

(Assuming the monthly rents are equal throughout the year)

What is the Potential Gross Rent Multiplier? ________________________

What is the Effective Gross Rent Multiplier? ________________________

Answer 40

Potential Gross Rent Multiplier:
760,000 ÷ 20,000 = 38.000

Effective Gross Rent Multiplier:
760,000 ÷ 19,200 = 39.583

Question 41

The property you are asked to appraise has a mortgage of $400,000 with annual mortgage payments of $44,000. You complete a reconstructed operating statement that indicates a Net Operating Income of $50,000. Comparable properties in the area indicate an equity capitalization rate of 0.08. Based on this data, what is the value of this property utilizing the Equity Residual Technique?

Answer 41

Net Operating Income $50,000

Deduct Annual Debt Service -44,000

Income to Equity 6,000

Capitalize Equity Income (6,000 / 0.08) 75,000

Add Mortgage Value to Equity Value (75,000 + 400,000) $475,000

End of

Question 42

A new assignment involves a property with an available equity of $25,000. As in many prior case studies, the appraiser prepares a reconstructed operating statement, and the indicated Net Operating Income is calculated to be $10,000.

Research determines that an appropriate equity capitalization rate for the subject property would be 0.10. Additional research yields an indicated mortgage capitalization rate as being 0.08.

What is the indicated value of the mortgage? _________________________

Answer 42

Equity $25,000

Net Operating Income 10,000

Subtract the Equity x Equity Rate (25,000 x 0.10) -2,500

Income to Mortgage 7,500

Divide Mortgage Income by Mortgage Rate (7,500 / .08) $93,750

Question 43

There is a new assignment in which the appraiser will be utilizing an overall rate to capitalize the Net Operating Income. This case study also utilizes techniques learned in Chapter 22.

The data that is available indicates that financing is readily available at 70% of the total property value. Loan term on such financing is 20 years, and payments are at 8% interest. Research indicates a mortgage capitalization rate of .1004, and through comparable sales, the equity capitalization rate is estimated at 7%.

Based on the data included here, what is the indicated overall capitalization rate using the Band of Investment (Mortgage Equity) methodology?

Overall capitalization rate: ________________________

Answer 43

Mortgage: 0.70 x 0.1004 = .0703

Equity: 0.30 x 0.0700 = +.0210

Overall Capitalization Rate: .0913

Question 44

In yet another assignment, an appraiser elects to utilize the Debt Coverage Ratio methodology to determine an overall rate.

Properties similar to the subject can be purchased with a 70% mortgage, and would have a 20-year amortization at 8% interest.

Research indicates that the mortgage capitalization rate is 0.1004, and this particular lender is requiring a 1.2 Debt Coverage Ratio.

What is the indicated overall capitalization rate? _____________________

Answer 44

.7*0.1004 *1.2 = .0843

Question 45

Using linear regression, with a single variable being the living area square footage of the properties, calculate an indicated value for your subject property that has 7,200 square feet.

Sale Price Square Foot
$26,000 6,800
$29,000 7,000
$34,000 7.900
$35,000 8,100
$37,000 8,800
$38,000 9,900

Indicated value: ______________________

Answer 45

26,000 [ENTER] 6,800 [ Sum+ ]
29,000 [ENTER] 7,000 [ Sum+ ]
34,000 [ENTER] 7.900 [ Sum+ ]
35,000 [ENTER] 8,100 [ Sum+ ]
37,000 [ENTER] 8,800 [ Sum+ ]
38,000 [ENTER] 9,900 [ Sum+ ]

7,200 [ g ] [ 2 ]

Display reads: 29,839.54

Question 46

A property produces a Net Operating Income of $10,000 per year. The holding period is five years.

It is estimated that the value will increase by 20% over the holding period.

If the discount rate is 10%, and the multiplier from the financial tables is 0.163797, what is the value?

Value: _______________________

Answer 46

Overall Rate
0.10 – (0.20 x 0.163797) = 0.067241

10,000 / 0.067241 = 148,720

Question 47

An appraiser desires to calculate the Net Present Value of a property that was originally purchased for $600,000.

The income for the first year is $45,000, $50,000 for the second, $55,000 in the third year, $60,000 in the fourth, and finally $65,000 in the fifth year.

The anticipated sale price at the end of the holding period is estimated to be $700,000.

The yield rate is 11%.

What is the Net Present Value? _____________________

Answer 47

600,000 [CHS] [ g ] [CFo]
45,000 [ g ] [CFj]
50,000 [ g ] [CFj]
55,000 [ g ] [CFj]
60,000 [ g ] [CFj]
765,000 [ g ] [CFj]
11 [ i ]
[ f ] [NPV]
Display reads: 14,851.31

Net Present Value: $14,851.31

Question 48

An investor client is trying to determine the total value of all assets held. You are contacted to estimate the value of a life interest that is held on an industrial warehouse property.

The present market value of the property is determined to be $300,000. The life expectancy of the life tenant is estimated to be 15 years. The market rate for this type of property is 10%. The estimated value of the property at the end of the 15 years is $450,000.

What is the value of the life interest? ______________________

Answer 48

Keystrokes for Life Interests:

15 [ n ]
10 [ i ]
450,000 [CHS] [FV]
[PV]
Display reads: 107,726

300,000
-107,726
192,274 (Value of the life interest)

Question 49

A property is leased at a below-market rent of $300,000 annually.

The lessee elects to sublease the property for the next 5 years at a flat rent of $400,000.

If the discount rate is 12%, using your financial calculator, what is the value of this sandwich lease?

Value of sandwich lease: _______________________

Answer 49

Keystrokes are:

5 [ n ]
12 [ i ]
100,000 [CHS] [PMT]
[PV]
Display reads: 360,477.62

Value of the Sandwich Lease is $360,477.62

Question 50

Mortgage financing is available for marina purchases. Typical terms require a 30% down payment, with a 20-year term and an interest rate of 8%. The annual mortgage constant is 0.10185. Investors in marinas and other similar properties demand a return to equity of 13%.

Answer 50

Band of Investment, Mortgage/Equity: (0.7 x 0.10185) + (0.3 x 0.13) = indicated cap rate 0.071295 + 0.039 = 0.110295 or 11.03% indicated cap rate (rounded)