Income Approach 1 Modules 1 to 22 Flashcards
Direct Capitalization (179 cards)
1
Q
Module 1 Project market and contract rents are examples of: a. Externalities b. Substitution c. Change d. Anticipation
A
d. Anticipation
2
Q
Module 1
How is capitalization defined?
a. Contribution of a particular component to the value of the whole.
b. Conversion of income to value
c. Most probable selling price
d. Conversion of benefits received in the future to present value
A
b. Conversion of income to value
3
Q
Module 1 Which principle refers to the amount that the absence of a component of value would detract from the value of the whole? a. substitution b. contribution c. anticipation d. externalities
A
b. contribution
4
Q
Module 1 A good example of the principle of supply and demand is: a. Land and building b. Mortgage and equity c. Anticipation and change d. Market rents
A
d. Market rents
5
Q
Module 1
The two general methods of capitalization are called
a. yield and property model
b. discounted cash flow analysis and yield
c. Multiplier and direct
d. Direct and yield
A
d. Direct and yeild
6
Q
Module 1 A small retail property has a net operating income of $250,000 and the appropriate capitalization rate is 8%. What type of capitalization rate should be used to solve this problem? a. Direct Capitalization b. Value Capitalization c. Yield Capitalization d. Discount Capitalization
A
a. Direct Capitalization
7
Q
Module 1 A single years income is converted into value using a. capitalization rate b. change c. income rates d. yield
A
a. capitalization rate
8
Q
Module 1 What is the value of a property with a $100,000 potential gross income and potential gross income multiplier of 4.0? a. $500,000 b. $400,000 c. $200,000 d. $300,000
A
b. $400,000
V = I x M
9
Q
Module 1 A small retail property has a net operating income of $250,000 and the appropriate capitalization rate is 8%. What is the symbol for which we are solving? a. Yield Rate Y b. Value V c. Capitalization Rate R d. Income I
A
b. Value V
10
Q
Module 1 Which of the following is sometimes called a factor? a. discount rate b. multiplier c. capitalization rate d. yield rate
A
b. multiplier
11
Q
Module 2
Which of the following is not a reason someone would want more than $1,000 to wait for the money?
a. Passage of time, during which person has no use of the money
b. risk of not receiving it
c. erosion of purchasing power
d. a dollar in the future is worth more than receiving a dollar now
A
d. a dollar in the future is worth more than receiving a dollar now.
12
Q
Module 2 What is the effective annual interest rate for a $1,000 loan at 6% nominal interest if the compounding frequency is daily? a. 6.090% b. 6.168% c. 6.00% d. 6.183%
A
b. 6.183%
Nominal interest rate: Stated or contract rate, an interest rate, usually annual, that does not necessarily correspond to the effective or compound rate. This is an annual rate.
1. 6/365 = .0164%
2. n=365, i=.0164, PV= 1,000 FV=? = 1,061.68
3. 1000 - 1061.69 = 61.68 (earned interest)
4. 61.68/1000 = 6.168%
13
Q
Module 2 Assume a five year investment period and in initial investment of $1,000 that pays 6% interest annually. Which of the following represents the total interest paid over the five year period? a. $262.48 b. $348.97 c. $418.52 d. $338.23
A
d. $338.23
n= 5, i=6, PV=1,000, FV? = $1,338.23
1,338.23 - 1,000 = 338.23
14
Q
Module 2 Assume a five year investment period and an initial investment of $1,000 that pays 6% interest annually. Which of the following represents the balance in the account at the end of the five year investment? a. $1,191.02 b. $1,338.23 c. $1,123.60 d. $1,262.48
A
b. $1,338.23
15
Q
Module 2 Cash flow (of CF) is a term used to describe a. downstream money b. single amounts of money c. money flow d. multiple amounts of money
A
d. multiple amounts of money
16
Q
Module 2
An investor invests $1,000 today and receives $1,060 in 1 year. What does the $60 represent to the investor?
a. principle
b. return on his investment
c. return on and return of his investment
d. return of his investment
A
b. return on his investment
17
Q
Module 2 Underlying compound interest that holds $1 received today is worth more than $1 received in the future due to cost, inflation, and the certainty of payment is referred to as a. parlay b. time value of money c. double interest d. extraction
A
b. time value of money
18
Q
Module 2 Which of the following describes the Inwood factor? a. Present value of one b. Future value of one c. Installment to amortize one d. Present value of one per period
A
a. Present value of one
19
Q
Module 2 What is the future value after 5 years for a $1,000 investment made today and earning 3% interest? a. $862.61 b. $1,161.62 c. $5,309.13 d. $1,159.27
A
d. $1,159.27
n =5, i = 3, PV = 1,000, FV = ? = $1,159.27
20
Q
Module 2 Which of the following describes the sinking fund factor? a. installment to amortize one b. future value of one c. future value of one per period d. present value of one per period
A
c. future value of one per period
21
Q
Module 3 The lump sum benefit an investor receives or expects to receive at the termination of an investment describes a. present value b. reversion c. income in year n+1 d. capitalized value
A
d. reversion
22
Q
Module 3 Which of the following refers to the reversion in the HP-12C Financial keys? a. PV b. PMT c. FV d. n
A
c. FV
23
Q
Module 3 What is the present value of the right to receive $60,000 each year for 8 years if the required yield rate is 4% if payments are in advance? a. $420,1123 b. $436,928 c. $403,964 d. $214,625
A
c. $403,964
PMT= 60,000, n = 8, i = 4, PV = ? = 403,964
24
Q
Module 3 Discounting is a procedure used to convert periodic incomes, cash flows, and reversions into a. future value b. past value c. temporary value d. present vale
A
d. present value
25
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Module 3
Hoe much should an investor pay today for the right to receive $50,000 per year each year for the next 10 years if he desires to yield 8%?
a. $23,159
b. $266,749
c. $335,504
d. $500,000
```
c. $335,504
PMT = 50,000 n = 10, i = 8, PV = ? = 335,504
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```
Module 3
Contract of regular payment of predictable amount is known as
a. Present value of one per period
b. sinking fund
c. reversion
d. annuity
```
d. annuity
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Module 3
Which of the following statements about an annuity is correct?
a. payment must be level
b. payments must be perpetual
c. payment must be received at the end of the period
d. payments must occur in regular predictable amounts
d. payments must occur in regular predictable amounts
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Module 3
What are the monthly payments of a $250,000 mortgage loan amortized over 15 years at 8% interest, monthly compounding?
a. $28,669
b. $2,433.95
c. $2,373.30
d. $2,389.13
```
d. $2,389.13
PV = $250,000, n = 15g, i = 8g, PMT = ? = 2,389.13
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```
Module 3
What is the sinking fund factor at 9% yield rate and a 10 year holding period?
a. 0.1558
b. 0.0736
c. 0.0604
d. 0.0658
```
d.0.0658
Sinking fund factor:
The compound interest factor that indicates the amount per period that will grow, with compound interest to $1 (or other unit of currency). Also known as the periodic payment to grow one and sometimes as the acronym SFF.
n = 10, i = 9, FV = 1, PMT = ? = 0.0658
30
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Module 4
What is the present value of One per period at 5% interest for 8 years?
a. 5.8666
b. 0.6806
c. 6.4632
d. 6.7864
```
c. 6.4632
| i = 5, n = 8, PMT = 1, PV =? = 6.4632
31
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Module 4
What is the future value of One per period if the term is 8 years and the interest rate is 5%
a. 1.4775
b. 5.8666
c. 9.5491
d. 6.4632
```
a. 1.4775
n = 8, i = 5, PV = -1, FV = ? = 1.4775
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```
Module 4
If the loan amount is $300,000 and the monthly payment is $2,315.45 for 25 years, what is the mortgage interest rate?
a. 6.67%
b. 9.26%
c. 8.0%
d. 7.86%
```
c. 8.0%
```
25gn,
300,000 CHS, PV,
2315.45 PMT
Solve i
enter, 12x = 8.00
```
33
```
Module 4
Module 4
Which of the following is the symbol for the loan amount?
a. Mo
b. Vo
c. Rm
d.Vm
```
d. Vm
34
```
Module 4
What is the loan balance on a mortgage with 10 years remaining if the interest rate is 8% monthly compounding, and the monthly payment is $1,834.41?
a. $151,194
b. $147,708
c. $220,129
d. Not enough information to solve
```
```
a. $151,194
10gn
8gi
1,834.41 PMT
PV
= $151,194
```
35
```
Module 4
Not one of the six functions of One, _____ is a related factor that always expresses the total loan payment per year for a $1 loan based on the nominal interest rate.
a. annual debt service
b. sinking fund
c. mortgage constant
d. mortgage capitalization rate
```
d. mortgage capitalization rate
to calculate mortgage constatn
R= I/V or Rm= Im/Vm
Rm - the capitalization rate for debt, the ratio of the annual debt service to the principal amount of the mortgage loan, also known as the annual mortgage constant.
36
```
Module 4
Identify the function by the method listed below used to extract its value from the HP12C Calculator
- 1 in PV solve for PMT
a. Present value of one
b. Future value of one
c. Installment to ammortize one
d. sinking fund factor
```
c. Installment to ammortize one
Six Functions of a Dollar
1. Amount of One/Future Value of One = 1 in PV Solve for FV
2. Present Value of One/Reversion Factor=1 in FV Solve for PV
3. Present Value of One Per Period/Level Annuity Factor= 1 in PMT Solve for PV
4. Amount of One Per Period/Sinking Fund Factor= 1 in PMT solve for FV
5. Sinking Fund Factor/Periodic Payment to Grow One= 1 in FV solve for PMT
6. Installment to ammortize one/Amortization factors=1 in PV solve for PMT
37
```
Module 4
Identify the function by the method listed below used to extract its value from the HP12C Calculator
1 in PV Solve for FV
a. Future value of one per period
b. Sinking fund factor
c. Future value of one
d. Present value of one
```
c. Future value of one
38
```
Module 4
A property is leased for $50,000 annual net income for 6 years. At the end of year six the property will be worth $650,000. What is the current value of the property if the appropriate discount rate is 9%?
a. $774,387
b. $555,555
c. $611,870
d. $632,056
```
```
c. $611,870
50,000 PMT
6, n
650,000, FV
9, i
PV - 611,869.70
```
39
```
Module 4
Identify the function by the method listed below used to extract its value from the HP12C calculator
- 1 in FV Solve for PMT
a. Sinking fund factor
b. Installment to amortize one
c. Future value of One per period
d. Present value of one per period
```
a. sinking fund factor
40
Module 5
Which of the following is not an advantage of direct capitalization?
a. Easy to use with special rent patterns, such as rent concessions and below-market rent.
b. Easy to support
c. Easy to estimate first year income
d. Easy to explain
a. Easy to use with special rent patterns, such as rent concessions and below-market rent.
41
Module 5
Which of the following sets of terms does not belong?
a. Cash on cash rate and equity yield rate
b. Overall rate and Property yield rate
c. Mortgage interest rate and mortgage constant
d. Equity cap rate and equity dividend rate
c. Overall rate and property yield rate
42
```
Module 5
The mortgage interest rate represented by subscripting is
a. R
b. M
c. Y
d. V
```
c. Y
43
```
Module 5
A property's first year income was $25,000 and is forecast to be level over the 5 year holding period. The value is also not expected to change. If the property sells for $250,000 what would the yield rate be?
a. 10%
b. 15%
c. Higher than 10%
d. Lower than 10%
```
a. 10%
```
250,000 PV
25,000 PMT
5 n
25,000 FV
i =? = .10
```
44
```
Module 5
Advantages of the yield capitalization approach are that is accommodates atypical income and expense patterns and
a. premises are limited
b. premises are broad
c. premises are explicit
d. premises are vague
```
c. Premises are explicit
45
```
Module 5
The income and value associated with property can be divided into all but which of the following ways?
a. Physically
b. Artificially
c. Legally
d. Financially
```
b. Artificially
5-6 -Bundle of rights in the income approach
The income stream can be divided in four ways making each component less than the bundle of rights.
Physically- Land and Building
Financially - Mortgage and Equity
Economically - Income stream and reversion
Legally - Real property, tangible property, intangible assets
46
```
Module 5
Which of the following interests is both a landlord and a tenant?
a. sandwich position
b. leased fee
c. leasehold
d. fee simple
```
a. sandwich position
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Module 5
An ownership interest held by a landlord with the rights of use and occupancy conveyed to others is a
a. sandwich lease
b. leased fee estate
c. fee simple estate
d. leasehold estate
```
b. leased fee estate
48
```
Module 5
Net operating income plus operating expenses equals
a. annual debt service
b. effective gross income
c. pretax cash flow
d. potential gross income
```
b. effective gross income
To put it another way, effective gross income is the anticipated income from all operations of the real property after allowance is made for vacancy.
49
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Module 5
Which of the following relationships represents the leasehold interest?
a. unencumbered ownership interest
b. interest held by the lessee
c. Landlord ownership interest
d. Absolute ownership
```
b. Interest held by the lessee
Leasehold estate is the interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.
50
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Module 6
All capitalization methods require
a. estimate of first year income
b. income for the past 5 years
c. estimate of last-year income
d. no estimate of income
```
a. estimate of first year income
51
```
Module 6
Contract rent prior to a deduction for concessions is
a. effective rent
b. market rent
c. scheduled rent
d. face rent
```
d. face rent
Also known as nominal rent, face rent is defined as Contract rent prior to deduction of concessions.
52
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Module 6
The type of rent used for vacant and owner occupied space is
a. effective rent
b. deficit rent
c. contract rent
d. market rent
```
d. market rent
53
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Module 6
Which of the following is the one estimate that is common to both discounted cash flow analysis and direct capitalization?
a. First years income
b. reversion
c. Yield rate
d. Overall cap rate
```
a. First years income
54
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Module 6
The rental income received in accordance with the terms of a percentage lease is
a. percentage rent
b. effective rent
c. deficit rent
d. contract rent
```
a. percentage rent
55
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Module 6
Rent began at $20 per square foot three years ago and is scheduled to escalate according to the annual increase in the consumer price index. If the consumer price index was 188.2 three years ago, 190.3 two years ago, and 198.1 last year, what was the rent two years ago?
a. $19.00
b. $21.05
c. $19.78
d. $20.22
```
d. $20.22
190.3/188.2 -1 = 0.112
$20 * (1+0.112) = $20.22
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Module 6
Which of the following is the total income attributable to real property at full occupancy before vacancy and operating expenses are deducted
a. Pre tax cash flow
b. Potential gross income
c. effective gross income
d. Net operating income
```
b. Potential gross income
Potential gross income is defined as the total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.
57
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Module 6
Annual rent under a shopping center lease is summarized at $100,000 plus 5% of gross sales over $2,000,000. The tenant is forecast to gross $2,500,000 this year. The market rent for this space is $75,000 plus 3% of gross sales over $1,500,000. How much rent will the tenant pay this year
a. $100,000
b, $125,000
c. $150,000
d. $105,000
```
b. $125,000
500,000 * .05 = 25,000
25,000 + 100,000 = 125,000
58
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Module 7
The lease provision that allows a tenant to cancel a lease is
a. a buyout clause
b. an escape clause
c. a renewal option
d. pass through
```
b. an escape clause
59
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Module 7
The term that refers to the right, but not the obligation, of a tenant to continue a lease at a specified term and rent is
a. a renewal option
b. a flat rental lease
c. an escape clause
d. a buyout clause
```
a. a renewal option
60
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Module 7
The provision in a lease that provides for a payment by a landlord or a tenant to induce a lease cancellation is
a. a renewal option
b. a buyout clause
c. an escape clause
d. a pass-through
```
b. a buyout clause.
61
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Module 7
The clause in a lease that limits a tenant's share of operating expenses is
a. an expense cap
b. an expense stop
c. an expense start
d. an expense hold
```
a. an expense cap
62
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Module 7
A lease that provides for specified changes in rent at one or more points during the lease term is
a. a graduated rental lease
b. a revaluation lease
c. an index lease
d. a percentage lease
```
a. a graduated rental lease
63
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Module 7
A lease that grants the right to use and occupy land is
a. a master lease
b. a full service lease
c. a flat lease
d. a ground lease
```
d. a ground lease
64
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Module 7
The typed of lease that is a specified level of rent that continues throughout the lease term is
a. an index lease
b. a revaluation lease
c. a graduated rental lease
d. a flat rental lease
```
d. a flat rental lease
65
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Module 7
The lease characteristic that is the term or length of the lease that establishes the period over which schedule income can be expected to be received is
a. change
b. quality
c. durability
d. quantity
```
c. durability
Income Characteristics of Leases:
Quantity: The amount of income stipulated in the lease
Quality: The credit strength of the tenant and the relationship of the contract rent to market rent determine the probability of collecting the income stipulated in the lease.
Durability: The term (length) of the lease establishes the period over which scheduled income can be expected to be received.
66
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Module 7
The lease characteristic that is the amount of income stipulated in a lease is
a. quantity
b. durability
c. change
d. quality
```
a. quantity
Income Characteristics of Leases:
Quantity: The amount of income stipulated in the lease
Quality: The credit strength of the tenant and the relationship of the contract rent to market rent determine the probability of collecting the income stipulated in the lease.
Durability: The term (length) of the lease establishes the period over which scheduled income can be expected to be received
67
Module 7
The two primary adjustment techniques used to estimate market rent are
a. relative comparison analysis and ranking analysis
b. matched pairs and qualitative
c. matched pairs and quantitative
d. quantitative and qualitative
a. relative comparison analysis and ranking analysis
68
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Module 8
For direct capitalization, vacancy and collection loss generally applies to what year's potential gross income?
a. The past year's
b. The present year's
c. 5 years ago
d. Next year's
```
d. Next year's
69
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Module 8
The amount of vacant space that is needed in a market for its orderly operation is
a. physical vacancy
b. structural vacancy
c. market vacancy
d. frictional vacancy
```
d. frictional vacancy
Frictional vacancy is the amount of vacant space needed in a market for its orderly operation. Frictional vacancy allows for move-ins and move-outs
70
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Module 8
Effective gross income is the anticipated income from all operations of the property at what time an allowance is made for vacancy and collection losses, and an addition is made for any other income.
a. Before
b. During
c. After
d. No allowance is made
```
c. After
Effective Gross Income:
The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses, and an addition is made for any other income.
71
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Module 8
For leased fee interest, potential gross income is based on
a. contract rents
b. market rents
c. land rents
d. building rents
```
a. contract rents
Interest Being Appraised:
Potential gross income based on market rents is used for the fee simple interest
Potential gross income based on contract rents is used for the leased fee interest.
72
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Module 8
Assume an apartment building with 20 one bedroom units, each with 300 sf and monthly rent of $800, and 20 two bedrooms, each with 600 sf and monthly rent of $1,000. If 2 of the one bedroom units are vacant and 5 of the two bedrooms are vacant, what is the the physical vacancy as a percentage of square footage?
a. 20%
b. 16%
c. 18%
d. 16.5%
```
c. 18%
25 units x 300 sf = 7,500
20 units x 600 sf = 12,000
7,500 + 12,000 = 19,500 total SF
2 x 300 = 600
5 x 600 = 3,000
6,300 vacant sf
3,600/19,500 = 0.18
Physical Vacancy Based on Square Footage
Physical Vacancy Rate = Amount of Sq. Ft. of Vacant Space / Amount of Sq. Ft. of total space
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```
Module 8
Assume an apartment building with 100 one bedroom units, each with 300 sf and monthly rent of $900, and 20 two bedrooms, each with 700 sf and monthly rent of $1,500. If 8 of the one bedrooms are vacant and 6 of the two bedrooms are vacant, what is the physical vacancy as a percentage based on unit count?
a. 12%
b. 13.5%
c. 10%
d. 13%
```
a. 12%
Physical Vacancy based on Unit Count
physical vacancy rate = Number of vacant units / Total number of units
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Module 8
Assume an apartment building with 25 one bedroom units, each 300 SF and monthly rent of $800, and 20 two bedrooms, each 600 SF and monthly rent of $1,000. If 2 of the one bedrooms are vacant and 5 of the two bedrooms are vacant, what is the physical vacancy as a percentage based on unit count?
a. 16.5%
b. 16%
c. 18%
d. 20%
```
b. 16%
75
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Module 8
The overall vacancy rate that occurs as a result of the interaction of supply and demand of a particular property type in a particular region or market is
a. structural vacancy
b. frictional vacancy
c. physical vacancy
d. market vacancy
```
d. market vacancy
Market Vacancy: The actual amount of vacant space in a market at a specific point in time; measured either as an amount or as a percentage of total supply. Market vacancy changes over time as a result of changes in the balance of supply and demand.
76
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Module 8
Vacant space resulting from a change in the structure of a market is
a. frictional vacancy
b. physical vacancy
c. market vacancy
d. structural vacancy
```
d. structural vacancy
Structural vacancy: Vacant space resulting from a change in the structure of a market
Structural Vacancy Examples:
- The gasoline station that used to configured to sell gasoline and vehicle repairs. Now that the successful business model is selling gasoline and convenience store items, older stations that cannot be converted often sit unoccupied until an alternative use becomes available.
- Occurs in a city dominated by a single employer or industry and that employer or industry contracts or leaves altogether. Structural vacancy can be expected in more than one property type., including retail and multi-unit housing.
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Module 8
The estimated percentage of potential gross income that will not be collected due to lack of occupancy in the building is
a. frictional vacancy
b. physical vacancy
c. economic vacancy
d. market vacancy
```
c. economic vacancy
Economic Vacancy: Vacancy expressed as a percentage of potential gross revenue. For a property with a mix of rental rates, the physical vacancy rate and the economic vacancy rate may not be the same if the spaces with higher or lower rental rates have disproportionate amounts of vacancy.
Economic vacancy is expressed as:
Economic vacancy rate+ Total rent loss due to vacant space / Total potential gross revenue
78
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Module 9
Assessed value x tax rate =
a. Net income
b. Property taxes
c. Assessed value
d. Leasing expenses
```
b. Property Taxes
79
```
Module 9
The periodic expenditures necessary to maintain the real property and continue production of effective gross income is
a. fixed expenses
b. operating expenses
c. management fee
d. variable expenses
```
b. operating expenses
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Module 9
Of the following, which is not considered a variable expense?
a. Property tax payment
b. Water bill
c. Elevator maintenance contract
d. Parking lot sweeping
```
a. Property tax payment
Fixed expenses are operating expenses such as property taxes and insurance that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.
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Module 9
Which of the following are often reported in connection with operating statements, but are not considered operating expenses>
a. Debt service
b. fixed exponents
c. replacement allowances
d. administrative expenses
```
a. debt service
Expenses often reported in connection with operating statements, but which are not considered operating expenses, include those related to
1. The structure of the ownership, such as corporation taxes and partnership (K-1) return preparation fees
2. The financing of the property, such as points and debt service
3. Income tax issues such as depreciation, interest, and income tax
4. Other properties or not related to investment real estate.
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Module 9
Which of the following is not an example of an item that would require coverage in a replacement allowance?
a. Staircase
b. Floor coverings
c. Parking lot
d. Roof
```
a. Staircase
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Module 9
The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted.
a. Total Operating Expenses
b. Replacement Allowance
c. Net Operating Income
d. Reimbursements
```
c. Net Operating Income
Net Operating Income: The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted.
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Module 9
If a parking lot needs repaving every 8 years and is now 5 years old, what is the annual replacement allowance using a straight-line premise if it costs $12,000 to repave?
a. $1,500
b. $2,400
c. $4,000
d. $12,000
```
a. $1,500
$12,000 / 8 = $1,500
85
```
Module 9
If a 6 year old roof will cost $15,000 to replace and has a total life of 15 years, what is the annual replacement allowance using the sinking fund premise and a 9% yield rate?
a. $510.68
b. $1,000
c. $1,666.66
d. $1,151.98
```
a. $510.68
Consider this: A sinking fund is a never ending set aside, so when you put on a new "whatever" the fund just continues. Therefore, you always calculate the payment based on total expected life, not remaining life. A brand new roof would have the same sinking fund amount as a 15-year old roof, all else equal.
86
Module 9
The operating expense ratio
a. is equal to the total operating expenses divided by the potential gross income.
b. is equal to the effective gross income divided by the net operating income.
c. is equal to the total operating expenses divided by the effective gross incomer
d. is equal to the total operating expenses divided by the net operating income
c. is equal to the total operating expenses divided by the effective gross income
87
```
Module 9
An example of a below-the-line item is
a. debt service
b. replacement allowances
c. fixed expenses
d. variable expenses
```
a. debt service
88
Module 12
What is the projected effective gross income for the following shopping center that charges tenants for their pro-rata share of all non management expenses based on gross space, including a percentage for marketing and administration?
- Total expenses (excluding management) of $450,000
-A 4% management cost on effective gross income
-An administrative and marketing fee of 10%
- A 6% projected vacancy rate
- Potential gross rents of $1,100,000
a. $1,602,700
b. $1,572,900
c. $1,595,000
d. $1,499,300
c. $1,595,000
Potential gross income of $1,100,000, Expense reimbursements including 10% administrative fee $450,000 x 1.10 = 495,000. Total potential gross income $1,595,000 less vacancy and collection loss (6%) $95,700.
89
```
Module 13
The relationship between price or value and net operating income expressed as a factor; the reciprocal of the overall [capitalization] rate is
a. net income multiplier
b. effective gross income multiplier
c. potential gross income multiplier
d. gross rent multiplier
```
a. net income multiplier
Net Income Multiplier (NIM) is the relationship between price or value and net operating income expressed as a factor; the reciprocal of the overall capitalization rate. This multiplier is somewhat analogous to price/earnings ratios used to value common stock.
NIM = Value / Net Income
90
```
Module 13
The rate of return on total capital invested refers to
a. equity capitalization rate
b. equity yield rate
c. overall capitalization rate
d. overall yield rate
```
d. overall yield rate
Overall Yield Rate (Yo) is the rate of return on the total capital invested, including both debt and equity. Also called the property yield rate. When applied to cash flows, it is called a discount rate.
91
```
Module 13
The ratio between the sale price (or value) of a property and its effective gross income is
a. net income multiplier
b. effective gross income multiplier
c. gross rent multiplier
d. potential gross income multiplier
```
b. effective gross income multiplier
Effective Gross Income Multiplier (EGIM) is the ratio between the sale price or value of a property and its effective gross income.
EGI = PGI - Vacancy and Collection Loss
EGIM = Sale Price (Value) / EGI
92
```
Module 13
The ratio between the sale price (or value) of a property and its potential gross income is the
a. net incomer multiplier
b. effective gross income multiplier
c. gross rent multiplier
d. potential gross income multiplier
```
d. Potential gross income multiplier
Potential Gross Income Multiplier (PGIM) is the ratio between the sale price of value of a property and its annual potential gross income.
PGI = Total Income
PGIM = Sale Price (Value)/PGI
93
```
Module 13
The subject property has potential gross income of $100,000 and effective gross income of $92,000. A comparable sold for$650,000 and had potential gross income of $120,000 and a vacancy rate of 5%. What is the indicated value of the subject using an effective gross income multiplier extracted from the comparable?
a. $570,175
b. $524,561
c. $498,333
d. $541,666
```
b. $524,561
Effective gross income = Potential Gross Income less vacancy and collection loss.
Find the EGIM of the Comp:
EGI = 120,000 - (120,000*.05)
EGI = 120,000 - 6,000
EGI = 114,000
EGIM = Sale Price or Value / EGI
F (factor) = Value / Income
EGIM = 650,000/114,000
EGIM = 5.70
Use Comp EGIM to determine value of subject:
V = EGI x EGIM
V = 92,000 x 5.70
V = $524,561
94
```
Module 13
A property has a potential gross income of $250,000, vacancy and collection loss of 5% and operating expenses of $80,000. If it sells for $1,750,000 what is the indicated net income multiplier?
a. 66.3%
b. 7.37
c. 7.00
d. 11.11
```
```
d. 11.11
Calculate Net Income:
Net income is gross income less vacancy and collection loss and less operating expenses.
250,000 - (250,000*.05) - 80,000 =
250,000 - 12,500 - 80,000 = 157,500
Net Income = $157,500
NIM = Value / Net Income or F(factor) = V /I
NIM = 1,750,000/157,500
NIM = 11.11
```
95
```
Module 13
The annualized yeild rate or rate of return on capital that is generated or capable of being generated within an investment or portfolio over a period of ownership is
a. equity yield rate
b. capitalization rate
c. discount rate
d. internal rate of return
```
d. internal rate of return
Internal Rate of Return (IRR) is the annualized yield rate or rate of return on capital that is generated within an investment or portfolio over a period of ownership.
*When a yield rate is calculated based on a property's cash flows, it is called an internal rate of return, or property yield.
96
```
Module 13
A property has potential gross income of $250,000, vacancy and collection loss of 5%, and operating expenses of $80,000. If it sells for $1,750,000 what is the indicated net income ratio?
a. 33.7%
b. 66.3%
c. 32.0%
d. 68.0%
```
b. 66.3%
Net Income Ratio (NIR) = Net Income / Effective Gross Income
NIR = NI/EGI or it is the complement of the OER, 1-OER
OER = Total Expenses/EGI
EGI = PGI less Vacancy and Collection Loss
```
Solve by getting OER :
250,000 (PGI) - (250,000 x .05) = EGI
237,500 = EGI
OER = Total expenses / EGI
OER = 80,000 / 237,500
OER = 0.337
NIR = 1 - OER
NIR = 1 - 0.337
NIR = 0.663 or 66.3%
```
Solve by calculating net income and divide by EGI
Net Income = PGI less vacancy/collection loss and operating expenses.
Net Income = 250,000 - (250,000 x .05) - 80,000
Net Income = 157,500
Effective Gross Income = PGI Less Vacancy and Collection
EGI = 237,500
NIR = NI/EGI
NIR = 157,500 / 237,500
NIR = 0.663 or 66.3%
97
```
Module 13
Subject has potential gross income of $150,000, a vacancy and credit loss of 6%, and fixed expenses of $19,350, variable expenses of $30,000 and a replacement allowance of $5,000. If an overall capitalization rate of 10% is extracted from a comparable sale before a deduction for a replacement allowance, what is the indicated value of the subject?
a. $956,500
b. $916,500
c. $866,500
d. $1,006,500
```
b. 916,500
The way the cap rate is extracted from the comparable has to be consistent in the way it is applied to the subject. The cap rate for the comparable was extracted before deducting for replacement allowance, so it needs to be applied to the subject before deducting the $5,000 for replacement allowance.
PGI = 150,000
Vacancy & Collection = .06*PGI = 9,000
Total Exp. = 19,350+30,000 = 49,350
Replacement Allowance = 5,000
150,000 - 9,000 - 49,350 = 91,650
91,650 / 0.10 = $916,500
V = I / Cap Rate
98
```
Module 13
A property sold for $500,000. Potential gross income was $95,000, vacancy and collection loss 8% and operating expenses $35,000. What is the indicated effective gross income multiplier?
a. 5.26
b. 5.72
c. 9.54
d. 10.48
```
b. 5.72
EGIM = Sale Price (value) / EGI
EGI = PGI - Vacancy & Collection Loss
```
EGI = 95,000 - (95,000 x .08)
EGI = 87,400
```
```
EGIM = 500,000 / 87,400
EGIM = 5.72
```
99
Module 13
Summary and Interrelationship of Formulas
Multiplier Formulas
```
To Extract Data from Comparable Sales:
F = V / I (I refers to any income)
PGIM = V / PGM
EGIM = V / EGI
Multiplier = V / Rent
NIM = V / I
```
```
To Apply to the subject property
V = I x F
V = PGI x PGIM
V = EGI x EGIM
V = Rent x Multiplier
V = I x NIM
```
100
Module 13
Summary and Interrelationship of Formulas
Overall Capitalization Formulas
To Extract Data from the Comparable Sales:
Ro = Io / Vo
To Apply to the Subject Property
Vo = Io / Ro
101
Module 13
Summary and Interrelationship of Formulas
Relationship Formulas
1. Ro = 1/NIM
2. OER = Operating Expenses / EGI
3. NIR - Io
4. OER = 1 - NIR
5. Ro = NIR / EGIM
102
```
Module 14
A property has a current land value of $500,000, which is expected to appreciate at 2% per year until the end of the investment in 5 years. If the discount rate is 3.75% and income will be level at $10,000 per year, what is the reversion?
a. $552,000
b. $734,664
c. $504,000
d. $414,363
```
a. $552,000
Reversion = A lump sum benefit that an investor expects to receive at the termination or sale of an investment
Reversion is just the value of the property at the end of the term after appreciating at a rate of 2% for 5 years. Reversion does NOT include the value of the cash flows over the term.
```
Using HP12C to solve
n = 5
i = 2
PV = $500,000
PMT = 0
Solve for FV
FV = 552,000
```
103
```
Module 14
The current overall capitalization rate for the subject property is 8%. Investors for this property type load the cap rate 75 basis points for a 5 year hold. First year net income is $125,000, and is expected to increase 2% per year. What is the reversion?
a. $1,725,126
b. $1,608,800
c. $1,577,258
d. $1,546,331
```
c. $1,577,258
1 Basis point is equal to 0.01% or 1/100 of a percent.
75 basis points = 0.75%
The loaded cap rate = 8.0% + 0.75% = 8.75%
```
Step 1: What is income in year 6? Income in year 1 is 125,000. We want to know what the income will be in Year 6. Thats' 6 - 1 = 5 years from now. Use 5 for n, just know that this is actually solving for year 6 as it is the end of year 5 but start of year 6
n = 5
1 = 2%
PV = -125,000
PMT = 0
Solve for FV = $138,010.10
```
Step 2: 8.0% or Rn is the initial or going in cap rate, loaded 75 basis points or 8.75%
Step 3: What is the reversion value? Substitute in IRV
V = I / R
V = $138,010.10 / .0875 = 1,577,258
104
```
Module 14
If the overall capitalization rate is 8% and the loan to value ratio is 70%, and mortgage terms are 7.5%, 30 years, monthly compounding, what is the indicated debt coverage ratio>
a. 1.21
b. 1.36
c. 1.35
d. 1.22
```
b. 1.36%
```
1. Calculate the mortgage constant
30g n
7.5 g i
1 chs pv
solve pmt
enter, 12 x = .083906
2. Multiply mortgage constant by the loan to value ratio
.083906 x .70 = 0.058734
3. Then to get DCR divide the overall rate by 0.58734
0.08 / 0.58734 = 0.1362 or 1.36%
```
DCR = The ratio of net operating income to annual debt service, which measures the relative availability of a property to meet its debt service out of net operating income, also called debt service coverage ratio.
DCR = Io / Im
A relationship between DCR and the overall cap rate exists in that - The Underwriters Method
Ro = M x Rm x DCR
```
where,
Ro = Overall Cap Rate
M = Loan to Value Ratio
Rm = mortgage interest rate
DCR = income/income mortgage
```
105
```
Module 14
What is the symbol for the loan to value ratio?
a. Ro
b. Vo
c. DCR
d. M
```
d. M
Loan to Value ratio = mortgage/total value
106
```
Module 14
The terminal capitalization rate is usually higher than the going-in rate because of these factors: age, improvements, and
a. predilcections
b. presuppositions
c. propositions
d. projections
```
d. projections
Why the terminal capitalization rate is usually higher than the going-in rate?
Age - Age may move the property into a lower investment category due to functional issues and competition from newer, superior properties
Improvements - Improvements will be older, more expensive to maintain, and closer to the end of their useful lives.
Projections - The farther that income is projected into the future, the greater the uncertainty that the income will meet projections.
107
```
Module 14
A reversion is a lump sum benefit that an investor receives or expects to receive
a. before an investment
b. during an investment
c. at the termination of an investment
d. at the beginning of an investment
```
c. at the termination of an investment
108
```
Module 14
A lump sum benefit that an investor receives or expects to receive at the termination of an investment is the
a. property balance
b. loan balance
c. present value of the reversion
d. reversion
```
d. reversion
109
Module 14
What is the typical relationship between an overall cap rate extracted from sales comparables and the overall cap rate developed with the debt coverage ratio model?
a. The rate developed with the debt coverage ratio model is usually lower
b. The extracted rate is usually slightly lower
c. They are often not equal for various reasons
d. They are usually identical
c. The are often not equal for various reasons.
A lender's stated debt coverage ratio may not be consistent with the lender's stated loan to value ratio. This means that the overall capitalization rate resulting from the application of the lender's quoted terms in the formula
Ro = M x Rm x DCR (underwriter's method)
is not equal to the market overall capitalization rate extracted using the formula
R = I / V
based on comparable sales.
When this inequality occurs, one of this particular lender's terms is not at market, meaning one of the lender's stated constraints is not an effective constraint. Either the quoted debt coverage ratio or the quoted loan to value ratio will not constrain the loan.
110
```
Module 14
The capitalization rate development technique is sometimes called
a. underwriter's method
b. undercapitalization method
c. under-the-table method
d. undertaker's method
```
a. underwriter's method
Underwriter's Method
Ro = M x Rm x DCR
111
```
Module 14
What ratio do lenders sometimes use as a loan constraining factor?
a. Overall Capitalization Rate
b. Debt Coverage Ratio
c. Mortgage Capitalization Rate
d. Loan to Value Ratio
```
b. Debt Coverage Ratio
Lenders sometimes use the debt coverage ratio as a loan constraining factor. The formula that defines it is
DCR = Io/Im
112
Module 1
Economic Principles:
Anticipation
The perception that value is created by the expectation of benefits to be derived in the future. Most often associated with the income capitalization approach.
Example: Projected market and contract rents,converting income to value
113
Module 1
Economic Principles:
Externalities
The principle that economies outside a property have a positive effect on its value, which diseconomies outside a property have a negative effect on its value
Example: Market rents, vacancy rates, Market expenses, converting income into value
114
Module 1
Economic Principles:
Change
The result of the cause and effect relationship among the forces that influence real property value.
Example: Vacancy Rates, Converting income into value
115
Module 1
Economic Principles:
Substitution
When several similar commodities, goods, or services, are available, the one with the lowest price will attract the greatest demand and widest distribution.
Example: Market rents, market expenses, converting income to value
116
Module 1
Economic Principles:
Contribution
The value of a particular component is measure in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole.
Example: Land and building to the whole
117
Module 1
Economic Principles:
Supply and Demand (as it relates to real estate)
The price of real property varies directly but not necessarily proportionately with demand and inversely, but not necessarily proportionately with supply
Example: Market Rents, vacancy rates, market expenses, converting income to value.
118
Symbols and Formulas
| I_M
Annual debt service, also called income to the mortgage
119
Symbols and Formulas
| i
interest rate, discount rate
120
Symbols and Formulas
| I
Income
121
Symbols and Formulas
| I_B
Income to the Building
122
Symbols and Formulas
| I_E
Net income to the equity
123
Symbols and Formulas
| I_L
Income to the land
124
Symbols and Formulas
| I_LF
Net income to the leased fee
125
Symbols and Formulas
| I_LH
Net income to the leasehold ( or to the sandwhich lease if there is an SLH)
126
Symbols and Formulas
| I_o
Net operating income also called NOI
127
Symbols and Formulas
| IRR
Internal Rate of Return
128
Symbols and Formulas
| ITAO
Installment to ammortize one
129
Symbols and Formulas
| L
Ratio of land value to total value
130
Symbols and Formulas
| L
Land
131
Symbols and Formulas
| LF
Leased Fee
132
Symbols and Formulas
| LH
Leasehold
133
Symbols and Formulas
| M
Factor or Multiplier or Loan to value Ratio
134
Symbols and Formulas
| M
Mortgage
135
Symbols and Formulas
| MIRR
Modified Internal Rate of Return
136
Symbols and Formulas
| n
Term (in periods)
137
Symbols and Formulas
| N
Term (in years)
138
Symbols and Formulas
| NIM
Net income multiplier
139
Symbols and Formulas
| NIR
Net Income Ratio
140
Symbols and Formulas
| NOI
Net operating income also called I_o
141
Symbols and Formulas
| NPV
Net present value
142
Symbols and Formulas
| O
Overall or fee simple
143
Symbols and Formulas
| OER
Operating expense ratio
144
Symbols and Formulas
| PGI
Potential gross income
145
Symbols and Formulas
| PGIM
Potential gross income multiplier
146
Symbols and Formulas
| PMT
Level payment
147
Symbols and Formulas
| PV
Present Value
148
Symbols and Formulas
| R
Capitalization rate
149
Symbols and Formulas
| R_B
building capitalization rate
150
Symbols and Formulas
| R_E
pre-tax cash flow rate, also called equity capitalization rate
151
Symbols and Formulas
| R_L
Land Capitalization Rate
152
Symbols and Formulas
| R_LF
Leased fee capitalization rate
153
Symbols and Formulas
| R_M
mortgage capitalization rate
154
Symbols and Formulas
| R_N
Terminal capitalization rate
155
Symbols and Formulas
| R_o
Overall capitalization rate
156
Symbols and Formulas
| R_SLH
Subleasehold capitalization rate
157
Symbols and Formulas
| RR
Reinvestment rate
158
Symbols and Formulas
| 1/S_n1
Sinking fund factor
159
Symbols and Formulas
| SLH
Subleashold
160
Symbols and Formulas
| T
Effective tax rate (income tax)
161
Symbols and Formulas
| TI
Tenant improvments
162
Symbols and Formulas
| V
Value
163
Symbols and Formulas
| V_B
Building Value
164
Symbols and Formulas
| V_E
Equity Value
165
Symbols and Formulas
| V_L
Land Value
166
Symbols and Formulas
| V_LF
Leased fee value
167
Symbols and Formulas
| V_LH
Leasehold Value
168
Symbols and Formulas
| V_M
mortgage value (usually loan amount)
169
Symbols and Formulas
| V_N
Reversion value
170
Symbols and Formulas
| V_o
overall or fee simple value
171
Symbols and Formulas
| V_SLH
Subleasehold value
172
Symbols and Formulas
| W
Wraparound loan
173
Symbols and Formulas
| Y
Yield or discount rate
174
Symbols and Formulas
| Y_E
Equity yield rate
175
Symbols and Formulas
| Y_LF
Leased fee yield rate
176
Symbols and Formulas
| Y_LH
Leasehold yield rate
177
Symbols and Formulas
| Y_M
Mortgage yield rate
178
Symbols and Formulas
| Y_o
Property or overall yield rate
179
Symbols and Formulas
| Y_SLH
Subleasehold yield rate
