Income Approach Flashcards by Veronika Dvorak

What is Einstein’s “Rule of 72”?

“Rule of 72” - How long does it take to double your money at a given interest rate?

Step 1: Determine the interest rate to be examined. Let’s use 6% for our example.

Step 2: Divide the number 72 by 6%.

72 [ENTER] 6 [÷] Display reads: 12

At 6% interest you will double your money invested in 12 years. Unfortunately, your investments or bank deposits that are earning a lower amount of interest – 2%, say – would take 36 years, and at 1% interest it would take 72 years to double your money.

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Difference between Direct and Yield Capitalization

In Direct Capitalization, a single year’s Potential Gross Income is assumed to be indicative of its value.

In Yield Capitalization, it is assumed the value is reflected in the present value of a stream of future cash flows resulting from future Potential Gross Incomes.

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Income Formula

PGI Potential Gross Income

-V&CL - Vacancy and Collection Losses
______ __________________________________
EGI Effective Gross Income

-TOE - Total Operating Expenses (fixed, variable, replacement reserves)
______ _____________________________________
NOI Net Operating Income

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If the appraiser bases the income and calculations on existing leases, the ownership interest appraised can be classified as “______________.” If the appraiser bases the income and calculations on market rents, the appraised interest is “___________________.”

If the appraiser bases the income and calculations on existing leases, the ownership interest appraised can be classified as “leased fee.” If the appraiser bases the income and calculations on market rents, the appraised interest is “fee simple.”

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six-step appraisal process:

six-step appraisal process first.

Definition of the Problem
Scope of Work
Data Collection and Analysis
Application of the Approaches to Value
Reconciliation of Value Indications and Final Opinion of Value
Report of Defined Value Opinions

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Equity Residual Technique

Know Data:
- Mortgage
- Mortgage annual payments
- Annual net operating income
- Equity cap rate

What is property value?

NOI - Annual Debt Service (Mortgage Payment) = ** Residual Income to Equity**

Residual Income to Equity/Equity Cap Rate = Available Equity

Available Equity + Mortgage = ** Property Value**

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Mortgage Residual Technique

Know Data
-Available equity
- Annual net operating income
- equity cap rate
- mortgage cap rate

What is property value?

Available Equity * Equity cap rate = Residual Income to Equity

NOI - Residual Income to Equity = Mortgage Payment

Mortgage Payment / Mortgage cap rate = Mortgage value

Available Equity + Mortgage = Property Value

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Mortgage capitalization rate (RM):

The mortgage capitalization rate that is the ratio of the first-year debt payment divided by the beginning loan balance. In some instances, the ratio may be calculated using one month’s payment, but typically it is the total of the loan payment for an entire year. Also referred to as a mortgage loan constant.

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For example, a $100,000 loan has terms of 10 percent interest, monthly payments, and a 20-year term. Monthly payments equal $965.02. How do you calculate the mortgage capitalization rate?

RM = ($965.02 x 12) / $100,000 = 0.116, or 11.6%”

Monthly payments * 12 = Annual Payment

Annual Payment/Original Loan Amount = Mortgage Capitalization Rate

RM = ($965.02 x 12) / $100,000 = 0.116, or 11.6%”

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Band of Investment
Mortgage-equity formula:

The weighted average of the mortgage capitalization rate (mortgage constant) and equity capitalization rate (equity dividend rate) results in an estimate of the overall capitalization rate for the property (RO = M x RM + (1 – M) x RE).

For example: A property being appraised can be financed with a 75% loan. The loan has a 15-year term with monthly payments at 9 percent interest (indicated mortgage capitalization rate of 0.1217). Comparable sales indicate an equity capitalization rate of 10 percent. The overall capitalization rate can be estimated as follows:

RO = (0.75 x 0.1217) + (0.25 x 0.10) = 0.116

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Band of Investment
Land-building formula:

Land-building formula: The weighted average of the land capitalization rate and the building capitalization rate results in an estimate of the overall capitalization rate for the property (RO = L x RL + B x RB).

For example, comparable sales indicate that the land capitalization rate is 0.09, the building capitalization rate is 0.14, and the land-to-value ratio is 30 percent. The indicated overall capitalization rate can be calculated as follows:

RO = (0.30 x 0.09) + (0.70 x 0.14) = 0.125)”

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Debt coverage ratio (DCR):

The ratio of annual net operating income (NOI) divided by the annual debt service. Lenders usually specify a minimum DCR (e.g., 1.2) that they require the property to meet during the first year of a loan term.

For example, if a property is estimated to have an NOI of $12,000 for a given year and debt service (principle and interest) during that year is $10,000, then the DCR is $12,000/$10,000, or 1.2. ”

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Debt coverage ratio formula: A method of developing the overall capitalization rate

Debt coverage ratio formula: A method of developing the overall capitalization rate by multiplying the debt coverage ratio by the mortgage capitalization rate and the loan-to-value ratio for the property (RO = DCR x RM x M). See also band of investment technique.

For example, a property can be purchased with a 75% loan. The loan has a 15-year term with monthly payments at 9 percent interest (indicated mortgage capitalization rate of 0.1217). The lender requires a debt coverage ratio of 1.2. The overall capitalization rate can be estimated as follows:

RO = 1.2 x 0.1217 x 0.75 = 0.1095 [implied cap rate for property]

This method views the valuation problem from the point of view of the lender only. There is an implied equity dividend in the analysis. If the implied equity dividend reflects the requirement of a typical investor, this method may be used to estimate the overall rate for a market value appraisal.”

The Debt Coverage Ratio formula has the nickname of ”underwriter method” for obvious reasons. Because it is applicable when the implied equity dividend reflects the requirement of a typical investor, there are often occasions when this method would not be appropriate. It is important to note that the implied cap rate may or may not be the actual cap rate derived from other methods. It is only a check by the lender/underwriter on the “reasonableness” of the cap rate selected in an appraisal.

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Finding Overall Rate (RO) via Effective Gross Income Multipliers

This is a hybrid method that involves the net income ratio and the Effective Gross Income Multiplier.

Effective Gross Income is Potential Gross Income less the Vacancy and Collection Losses:

PGI – V&CL = EGI

The Net Income Ratio (NIR) is the Net Operating Income (NOI) divided by the effective gross income (EGI):

NOI / EGI = NIR

The Effective Gross Income Multiplier (EGIM) is then the Sales Price (aka: value) divided by the Effective Gross Income:

V / EGI = EGIM

To develop an Overall Rate (RO) divide the Net Income Ratio (NIR) by the Effective Gross Income Ratio (EGIM):

NIR ÷ EGIM = RO

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The Net Income Ratio is …

The Net Income Ratio (NIR) is the Net Operating Income (NOI) divided by the effective gross income (EGI):

NOI / EGI = NIR

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The Effective Gross Income Multiplier is …

The Effective Gross Income Multiplier (EGIM) is then the Sales Price (aka: value) divided by the Effective Gross Income:

V / EGI = EGIM

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Overall Rate (RO) utilizing Net Income Ratio by the Effective Gross Income:

NIR ÷ EGIM = RO

(NOI/EGI) / (Value/EGI) = NOI/Value = Ro

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DCF techniques can be applied in the valuation or analysis of:

DCF techniques can be applied in the valuation or analysis of:
-proposed construction
-land development
-condominium development or conversion
-rehabilitation development
-income-producing real estate of various types.

DCF analysis has become a requirement of many real property clients and intended users. These users of appraisal services favor the inclusion of DCF analysis as a management tool in projecting cash flow and return expectations, capital requirements, refinancing opportunities, and timing of future property dispositions.

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Yield Capitalization vs. Discounted Cash Flow

Yield Capitalization. Discounted Cash Flow analysis is under the umbrella of Yield Capitalization, but there is so much more involved that we will not only continue to discuss Discounted Cash Flow analysis, but also include other related procedures and methodologies

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C Mortgage Coefficient

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CF Cash Flow

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i Interest Rate

I Income

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IB Building Income

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IE Equity Income

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**I**L

**I**L Land Income

**I**LF

**I**LF Leased Fee Income

**I**LH

**I**LH Leasehold Income

**I**M

**I**M Mortgage Income

**I**O

**I**O Net Operating Income

IRR

IRR Internal Rate of Return

J “J” Factor

K “K” Factor

M Loan-to-value ratio

MIRR

MIRR Modified Internal Rate of Return

n Number of periods

NPV

NPV Net Present Value When estimating interest rates in net present value calculations, the rates used are typically: Current rates If the investment required for two different properties is different, the Net Present Values will differ even if all other factors are alike.

P Percentage of Loan Paid Off

R Capitalization Rate

**R**B

**R**B Building Capitalization Rate

**R**E

**R**E Equity Capitalization Rate

**R**L

**R**L Land Capitalization Rate

**R**M

**R**M Mortgage Capitalization Rate (constant)

**R**O

**R**O Overall Capitalization Rate

V Value

**V**B

**V**B Building Value

**V**E

**V**E Equity Value

**V**L

**V**L Land Value

**V**LF

**V**LF Leased Fee Value

**V**LH

**V**LH Leasehold Value

**V**M

**V**M Mortgage Value

**V**O

**V**O Overall Value

Y Yield Rate

**Y**E

**Y** E Equity Yield Rate

**Y**ET

**Y**ET Equity Yield Rate After Tax

**Y**LF

**Y**LF Yield to Leased Fee

**Y**LH

**Y**LH Yield to Leasehold

**Y**M

**Y**M Mortgage Yield Rate

**Y**O

**Y**O Overall Yield Rate (AKA: Property Yield Rate)

**Y**OT

**Y**OT Overall Property Yield Rate After Tax

Δ - Percent of change

ΔE

ΔE Percent of change in equity

ΔI

Δ percent of change in income

ΔO

ΔO percent of change in overall property value

**1/S**n

**1/S**n Present value factor

**a**n

**a**n▯ Present value of an amount per period

**1/S**n▯

**1/S**n▯ Sinking Fund Factor

**S**n

**S**n Future value of an amount

**S**n▯

**S**n▯ Future value of an amount per period

**1/a**n▯

**1/a**n▯ Partial payment factor

The premise used for valuing the income stream of a wasting asset is:

Hoskold

The K-factor is an income adjustment used to convert a stream of income changing at a constant ratio into its

Level equivalent

An algebraic formula used to calculate an overall rate that is based on mortgage equity analysis concept and allows for cash flow forecasts, including the impact of financing, is the:

Ellwood formula

In the Akerson format the non-algebrais formula is similar to:

The Band of Investment Method for determing a cap rate.

An alternative way of writing the Ellwood formula is:

Akerson format

The Ellwood "formula is applicable only to properties with stable or stabilized income streams and to properties with income streams expected to change according to the:

J-factor pattern or K-factor pattern

The premise used for valuing the income stream of a wasting asset is:

Hoskold

An income adjustment or stabilization factor formerly used to convert a stream of income changing at a constant ratio into its stable or level equivalent is the:

K factor

The Hoskold premise was designed to value the income stream of a/an

Wasting asset

The K-factor is an income adjustment used to convert a stream of income changing at a constant ratio into its

Level equivalent

An assumption that the present value of an income stream is based on a single discount rate is the definition of which of the following?

Inwood premise

A method of estimating property value by discounting all expected future cash flows refers to:

Yield Capitalization

An income adjustment or stabilization factor formerly used to convert a stream of income changing on a curvilinear basis into its level equivalent is the:

J factor

The Hoskold premise assumes that a portion of the net operating income is:

Reinvested at a safe rate

A wasting asset

A wasting asset is an item that has a limited life span and irreversibly declines in value over time. Examples include depreciating fixed assets such as vehicles and machinery and securities with time decay, like options, which continually lose time value after purchase.

A method of estimating property value by discounting all expected future cash flows refers to:

Yield Capitalization

Basic steps of Yield Capitalization:

Yield Capitalization, the basic steps are to: 1) Estimate a holding period 2) Determine estimated cash flows 3) Estimate a reversion 4) Select a yield rate 5) Calculate the present value of the cash flows and reversion

Direct Capitalization vs Yield Capitalization

In Direct Capitalization, the concern was using a single year's cash flow to reflect a stabilized income or estimate of stabilized income. In Yield Capitalization, the cash flow forecast addresses a series of years' cash flows, over the holding period. These cash flows most often are based on rental income from income producing properties. Even when a specific site improvement is owner-occupied and not currently experiencing rental income, the appraiser can extract from projected market rents that would reflect typical investor attitudes.

The difference between the present value of all positive cash flows and the present value of negative cash flows is referred to as:

Net Present Value

When the initial out-go is divided into the present value of the in-flows, the result is called the:

Profitability index A Profitability Index of -1 means that the investment: Fails to meet the profitability goals

The number of animals that can feed in an area without damaging other vegetation is known as:

Grazing capacity

Transferable development rights are often used to:

Preserve historic sites or buildings Preserve agricultural land

The contributory value of merchantable timber as it stands on timberlands is:

Stumpage value

Which is a consideration in valuing timberland?

Quality Species Obstacles

Rights purchased or acquired through condemnation that allow aircraft to fly at low elevations are called:

Avigation easements

As a general rule, in the appraiser's day-to-day practice, the real property rights being appraised are:

Surface rights

An area of public or private rangeland that is grazed as a single entity defines:

Grazing unit

In valuing mineral rights, which approach is sometimes considered unreliable?

Income Approach

The agency that sets standards for various trees is called the:

U. S. Forestry Service

Consideration of annual production, costs of extraction, and environmental issues apply to the valuation of:

Mineral rights

Comparable sales of airspace would more likely be found

In dense urban areas

Factors such as consumptive use and amounts that can be diverted relate to the appraisal of:

Water rights

The coal mining process that causes surface subsidence is:

Long wall

One method for determining the value of air rights is:

Before-and-after

A before-and-after method involves two values (before rights and after rights) with the difference between the values being the value of the rights. This method can be a very reliable indicator of value for what type of rights? Intangible Water Life estate Investment

Water

A logical flow to a narrative appraisal report is:

Introduction, Problem Identification, Presentation of Data, Analyses and Conclusions

When an appraiser performs a feasibility study and comparable sales are scarce, what is a common alternative?

Subdivision Analysis

External obsolescence can be measured by

1. Capitalizing income loss due to the negative influence 2. Comparison sales of similar properties which are and are not subject to the same negative influence

The commonality of the J Factor and the K Factor is that they both

Solve problems with increasing/decreasing income flows

If an appraiser analyzes the demand in a local area relative to a national benchmark, that is:

BPI - buying power index

The buying power index (BPI) relates to

Demand and ability

The K-factor is used to convert a stream of income that changes….

at a constant ratio into a level payment equivalent.

Prior to 1987, short term capital gains were treated as ordinary income but long term capital gains were not taxed. After 1987,

Both are taxed as ordinary income

When the appraiser identifies taxable profit, it is called:

Capital Gain

One of the methods of measuring external obsolescence is by:

Capitalizing the income loss due to the negative influence

The statement, “capitalization rate and yield rate are interchangeable” is:

False. A cap rate uses one year’s data and a yield rate uses income streams for many years.

The difference between economic and locational obsolescence is:

Economic impacts areas and locational impacts a site

Ordinary Annuity vs. Annuity Due

Ordinary Annuity vs. Annuity Due An ordinary annuity is when a payment is made at the end of a period. An annuity due is when a payment is due at the beginning of a period.

An appraiser who takes an assignment beyond his level of competency, and does not take the necessary steps to become competent, will likely produce a: - Non-credible value opinion - A misleading report - A poorly-documented value opinion - All of these

All of these

Although the Income Approach can have different elements, depending on the property type, there are some basic expectations which are universal to the Income Approach. Which of the following would NOT be one of those universal expectations? - Credible data - Accurate calculations - Absolute accuracy in estimating replacement reserves - Properly developed and supported rates

Absolute accuracy in estimating replacement reserves

Commonly challenging assignment types include all of the following EXCEPT: - Car washes - Restaurants - Hotels - Office buildings

Office buildings

Federal financial institution regulatory agencies identified several violations related to the development of the Income Approach. Which of the following was NOT identified as an issue with the Income Approach? - Failing to address market trends - Failing to estimate the effective age - Using non-market based time constraints - Failing to report appropriate deductions and discounts for tract development appraisal

Failing to estimate the effective age

The subject of an appraisal review assignment can be: - All or part of an appraisal report - The workfile - Either or both of these

Either or both of these

A reviewer believes the original appraiser's capitalization rate of 9.5% is inappropriate, and changes it to 10.5%, which results in the reviewer's own opinion of value. What does USPAP state about the reviewer's obligations when reporting this opinion of value? - She may report her own value opinion within her review report - She must prepare a separate appraisal report which complies with Standard 2 - If she provides an oral report, she does not have to comply with USPAP - This situation does not result in the reviewer developing her own opinion of value

She may report her own value opinion within her review report

Which of these statements in a review report would indicate that the reviewer did NOT develop her own opinion of value? - I concur with the value conclusion - I do not agree with the value - The value conclusion is adequately supported - In my opinion, the value is too high

The value conclusion is adequately supported

According to Standard 3, if an appraiser who is reviewing a real property appraisal report is asked to provide his or her own opinion of value, that opinion must be developed in accordance with:

Standard 1

“Convincing or believable by virtue of forcible, clear, or incisive presentation” defines:

Cogent

Net present value (NPV) is a financial metric that seeks to capture the total value of an investment opportunity. The idea behind NPV is to project all of the future cash inflows and outflows associated with an investment, discount all those future cash flows to the present day, and then add them together.

NPV is a financial metric that seeks to capture the total value of an investment opportunity. The idea behind NPV is to project all of the future cash inflows and outflows associated with an investment, discount all those future cash flows to the present day, and then add them together.

Consideration for quality, quantity, transportation costs, and restoration cost apply to the valuation of:

Mineral rights

Agents of production include Land, Labor, Capital, and: Zoning Highest and Best Use Anticipation Coordination

Coordination

When the partial interest is less than 50%, the: Party still has full voting rights Value of the interest remains equal Value of the interest declines Management decisions remain equal

Value of the interest declines

When an appraiser identifies the cash flow after debt service but before income and capital gains taxes, it is called the: Equity dividend Internal Rate of Return Capital recovery rate Debt coverage ratio

Equity dividend

A percentage rent paid in addition to the base rent is called _______. Effective rent Excess rent Overage rent Supplemental rent

Overage rent

Taxable profit from the sale of a parcel of real property would be called _________. Net Operating Income Net Residual Income Capital Gain Effective Gross Income

Capital Gain

“Money paid for, or earned by, the use of capital; a return on capital as distinguished from a return of capital” is the definition of: capitalization interest principal leverage

interest

Vacancy and Collection Loss is a percentage calculation based on the: Potential Gross Income from rents only Potential Gross Income, including other income Effective Gross Income from rents only Effective Gross income, including other income

Potential Gross Income, including other income

The board of The Appraisal Foundation which establishes experience criteria for licensing and certification of appraisers is the: ASB AQB ASC APB

AQB

Because the estimates of revenues and rates in the future are subject to error, the use of this fair warning disclosure to the client is warranted: Jurisdictional Exception Hypothetical Condition Supplemental Standards Extraordinary Assumption

Extraordinary Assumption

An appraiser may find an older structure’s higher energy and maintenance costs less of a negative factor when: The buildings are masonry construction The buildings are frame construction Retrofitting is an option There is historical or retro appeal

There is historical or retro appeal

The number of animals that can feed in an area without damaging other vegetation is referred to as the: Cattle/acre ratio Acreage consumption factor Grazing capacity Grazing unit

Grazing capacity

The difference between a property selling for $30,000 thirty years ago, and selling for $100,000 today, is predominantly a matter of: Loss in the purchasing power of the dollar The principle of increasing returns Demand in the marketplace Appreciation

Loss in the purchasing power of the dollar

A lease that involves future rents being determined by market rents at predetermined intervals would be what type of lease? Leased fee extension Leasehold extension Recertification lease Revaluation lease

Revaluation lease

Estimated future cash inflows that may change, but have been adjusted to an equal amount per year are ____________. Capitalization rate factors Discounted Cash Flows Equities Stabilized incomes

Stabilized incomes

The relevant characteristics of an assignment consist of: A standard list of requirements Varied information from assignment to assignment A specific list of 11 minimum items Items retained in the workfile only

Varied information from assignment to assignment

The city of San Francisco was developed where it is, predominantly due to: Mountain views Rivers The bay Coal reserves

The bay

Identification of the type of soil on a given parcel is most important to what property type? Agricultural Industrial Freestanding single unit Office building

Agricultural

The mathematical process used with all of the table’s six functions is: Addition Subtraction Multiplication Division

Multiplication

Special use properties are typically valued using which approach to value? cost approach general income sales comparison income capitalization

cost approach

The best source for collecting data in order to predict future cash flows is: Past sales Current Websites Interviews with market participants The appraiser’s office files

Interviews with market participants

The term "Long Wall" refers to which of the following: A building measuring methodology A controversial coal mining methodology A construction sequence in framing The origin of the "chain" method for are of an acre.

A controversial coal mining methodology

The appraiser’s research and reporting needs to be as detailed as: The appraiser thinks appropriate That dictated by IREM The appraiser’s peers would have done The property owner dictates

The appraiser’s peers would have done

Management would be allocated under what expense category? Fixed General Reserves Variable

Variable

An appraiser discovers that a tenant providing free dry cleaning to the landlord for the duration of the lease would be addressed in a lease agreement under: Kick-backs Concessions Allowances Landlord perks

Concessions

A discount rate is synonymous with the: Yield rate Common rate Capitalization rate Safe rate

Yield rate

With DCF software, the appraiser should describe the software’s methods and ____________. Assumptions Reasoning Error ratio history Procedures

Assumptions

A rate of return on capital usually expressed as a compound annual percentage rate is the _____________. Discount rate Yield rate Capitalization rate Annuity rate

Yield rate

In the building residual technique, the appraiser deducts from the NOI the: Land value x RL Land value x RB Building value x RL Building value x RB

Land value x RL

If market rent is greater than contract rent, the leasehold value is _________. Equal to leased fee A negative A positive Of no value

A positive

Historically, most real estate properties have: Fallen behind inflation Kept up with inflation Out-paced inflation Not been compared to inflation rates

Out-paced inflation

When dividing two negative numbers: The result is positive The result is negative The signs cancel out Both A and C are correct

Both A and C are correct

The cost of foregone opportunities is: Entrepreneurial loss Entrepreneurial risk Opportunity cost Opportunities foregone

Opportunity cost

Lease terms for multifamily buildings in comparison to lease terms for office buildings are typically found to be: Shorter Somewhat similar Exactly the same Longer

Shorter

A minimum criterion to be considered, per the IRS in valuing historic preservation easements, is that the property must be: Over 100 years old Located in an historic district Constructed of period materials Not significantly altered from the original structure

Located in an historic district

A reviewer’s own opinion of value must meet, at a minimum, the reporting requirements of:

Standards Rule 2-2(b)

Buildings with higher rents, above average tenants, and superior construction are: Class A Class B Class C Class D

Class A

If an appraiser analyzes the demand in a local area relative to a national benchmark, that is known as ________. BTU BTI BPI BPO

BPI

The last item in the minimum reporting requirements is: The scope of work summary Support and rationale for the highest and best use A certification Signatures

A certification

To an appraiser, the relationship between the amount of unrented space and total space in a building is known as the: Absorption rate Equity rate Vacancy rate Yield rate

Vacancy rate

To have value, airspace must have __________. A severability clause in the deed Demand Height above 100 ft. Federal approval

Demand

It gives credibility to the assignment results when comparable properties that are analyzed for income are as similar to the subject as possible. Factors to be considered in determining comparability would include: Location, design, income Location, income, expenses Location, building class, amenities Location, location, location

Location, building class, amenities

The contributory value of merchantable timber as it stands on timberlands is called the: Recovery value Board feet value Lumber value Stumpage value

Stumpage value

Tenant improvements are: A valuable asset to the landlord A negative influence on re-leasing A positive or a negative influence on value and rents By definition, easily removed items

A positive or a negative influence on value and rents

In multi-family appraisal, the landlord typically pays the _____________. Electricity Gas Heating Water

Water

Another term appraisers use for a step-up lease is: Percentage lease Multi-story building lease Changing index lease Graduated payment lease

Graduated payment lease

For use with federally insured financial institutions, the definition of “market value”: References the fastest possible sale Contains no reference to time frame Specifically refers to three to six months Refers to a reasonable exposure time

Refers to a reasonable exposure time

A good source for the cost of pest control services would be: The Owner/Manager The American Pest Control Association (APCA) Interviewing Tenants The Journal of Pest Control Services

The Owner/Manager

A party entitled to receive a property held in a life interest after the prior estate expires is the: Heir Bequeathed Remainderman Joint partner

Remainderman

Per the IRS, a minimum criterion to be considered in valuing historic preservation easements is that the property must be: Over 100 years old Located in a historic district Constructed of period materials Not significantly altered from its original structure

Located in a historic district

Annual installments of regular contracted amounts are __________. PGIs EGIs Annuities Operating Incomes

Annuities

Free-standing single-unit properties are generally: Sold by auction Owner/user Affiliated with a franchise On 12-month leases

Owner/user

A discount rate can also be called a _________. Yield rate Common rate Capitalization rate Safe rate

Yield rate

STANDARD 4 states that reviewers must check for all of the following EXCEPT: Conformity Completeness Adequacy Relevance

Conformity

“A yield rate used to convert future payments or receipts into present value” defines: Discount rate Reversion rate Capitalization rate Sinking fund

Discount rate

The use of a site that offers the greatest financial returns is the: Current use Maximum use Designed use Highest and best use

Highest and best use

Maximizing the amount of front footage of a site is important to retail establishments for: Ingress Egress Visibility Median cuts

Visibility

Where in a lease are “grace period” clauses found? Under rental payment provisions As part of the escape clauses In the Lessee’s rights clause In the lease addendum

Under rental payment provisions

Occupancy rates are terms used most commonly in what type of property? Agricultural Free-standing single unit Industrial Hotel/motel

Hotel/motel

The return on an investment, which considers income received over time that equates the present value of future cash flows with the initial investment, is termed the: Net Operating Income Yield Rate Internal Rate of Return Overall Capitalization Rate

Yield Rate

USPAP says that an appraiser is expected to be at least as knowledgeable about the market for the type of property appraised as the typical _________. Market participants Brokers Sellers Buyers

Market participants

Land is valued as though: Level Developed Fee simple Vacant

Vacant

The number of animals that can feed in an area without damaging other vegetation is referred to as the: Cattle/acre ratio Acreage consumption factor Grazing capacity Grazing unit

Grazing capacity

When reconstructing an operating statement, receipt of partial subletting and easement fees would be included in: General expenses Use restrictions Lease clauses Other income

Other income

To calculate using the Rule of 72, first, key in [72] [ENTER] then________ [ ÷ ]. 72 The principal amount The number of years The interest rate

The interest rate

The Scope of Work, as far as the acceptability of the degree of research, is determined by an appraiser’s peers’ actions and: The intended user’s expectations Secondary market requirements The reporting format The age of the property

The intended user’s expectations

“An appraiser must determine, prior to accepting an assignment…” are words found in USPAP’s: Preamble Competency Rule Ethics Rule Jurisdictional Exception Rule

Competency Rule

According to a quoted USPAP reference, “The value of the whole…” Equals the sum of the parts Is less than the sum of the parts Exceeds the sum of the parts May equal, exceed or be less than the sum of the parts

May equal, exceed or be less than the sum of the parts

Annual installments of regular contracted amounts are __________. PGIs EGIs Annuities Operating Incomes

Annuities

Estimated future cash inflows that may change, but have been adjusted to an equal amount per year are ____________. Capitalization rate factors Discounted Cash Flows Equities Stabilized incomes

Stabilized incomes

An effective tool for bringing older numbers and data to current timeframes is the use of __________. Ratios Dollars The Rule of 72 Discounting

Ratios

An appraisal assignment would NOT include a Highest and Best Use analysis if it was for: Investment value Market value Value-in-use All of the above require Highest and Best Use analysis

Value-in-use

Disclosure of the work not performed: Is part of the certification Is not required Is required when necessary so as to not mislead Relates only to the inspection of the property

Is required when necessary so as to not mislead

Variable expenses would include: Heating and cooling equipment replacement Sewage lift station replacement Emergency generator installation Private well equipment repair

Private well equipment repair

When landowners purchase a right that cannot be used by the current owner for future development, it is a: Excess land transfer Transferable Development Right Development Easement Use Easement

Transferable Development Right

When a reviewer provides his or her own opinion of value in a review assignment, all of the following items must be reported EXCEPT: Identity of intended users All of the above must be included Identity of the interest appraised Identity of the appraisers completing the work under review

All of the above must be included

To have value, airspace must have __________. A severability clause in the deed Demand Height above 100 ft. Federal approval

Demand

Real Estate Taxes would be listed under what expense category? Fixed General Reserves Variable

Fixed

A tenant may be concerned about the financial stability of the landlord. Lease provisions addressing this issue would be found under: Project Accounting Lessee’s Security Landlord Guarantees Landlord Solvency

Landlord Solvency

The use of a site that offers the greatest financial returns is the: Current use Maximum use Designed use Highest and best use

Highest and best use

The rate of return beyond what is available in risk-free investment is called the: Risk premium Risk index Equity premium Equity index

Risk premium

When the initial out-go is divided into the present value of the in-flows, that results in the: Alpha index Beta index Cash flow index Profitability index

Profitability index

A 25% interest in a partnership that lacks operational control typically has: 25% of the total value Less than 25% of the total value Greater than 25% of the total value Equal voting power

Less than 25% of the total value

The specific needs of an individual investor are considered in a(n) ________ assignment. Market value Recovery value Investment value Highest and best use

Investment value

The best source for collecting data in order to predict future cash flows is: Past sales Current Websites Interviews with market participants The appraiser’s office files

Interviews with market participants

STANDARD 4 states that reviewers must check for all of the following EXCEPT: Conformity Completeness Adequacy Relevance

Conformity

An interest shared by co-owners who cannot individually convey any part of the property hold a (an): Undivided partial interest Tenant in common interest Leased fee interest Mortgagee interest

Undivided partial interest

Concessions can also contribute to: A. Expenses B. Collection Losses C. Increases in PGI D. Both A and B

D. Both A and B

A reward or compensation for contribution describes ____________. Commission Equity position Entrepreneurial profit Investor’s premium

Entrepreneurial profit

A capitalization rate used to forecast a reversionary value in DCF is a: Base rate Terminal capitalization rate Future value rate Going-in rate

Terminal capitalization rate

A letter of transmittal always includes the following EXCEPT: Description of the property Dates Type of value Value conclusion

Value conclusion

The income classification after deduction of Vacancy and Collection Allowances is referred to as the __________. Potential Gross Income Effective Gross Income Net Operating Income Pre-Tax Cash Flow

Effective Gross Income

An appraiser’s most critical concern in developing projected incomes is: Leverage Accuracy Amenities Vacancy rate

Accuracy

If the lender shares in any losses: Loan terms are shorter Investor always comes out ahead Holding periods are generally longer Loan terms are longer

Holding periods are generally longer

New construction hotel/motel appraisal assignments are initially concerned with what key factor? Local room rates Absorption rate Land to building ratio Room type ratio

Absorption rate

An appraiser should understand that renewal options allow the tenant to: Renew the lease as is Renew the lease with new rents and duration Renew the lease for an indefinite term Change the nature of the tenant’s business

Renew the lease with new rents and duration

The rate of return that reflects the effect of financing on the investor’s rate of return is called the: Internal Rate of Return Equity Yield Rate Overall Yield Rate Overall Rate

Equity Yield Rate

If market rent is greater than contract rent, the leasehold value is _________. Equal to leased fee A negative A positive Of no value

A positive

The approach to value most often used for time-share interests is: Discounted Cash Flow Income Capitalization cost approach sales comparison approach

sales comparison approach

In the appraisal of new shopping centers, a major consideration would be: Location of employment Absorption rates Regional occupancy statistics National occupancy statistics

Absorption rates

USPAP is fundamentally about: Development Communication Ethics and Competency Definitions and Advisory Opinions

Ethics and Competency

The agencies that regulate Federal Financial Institutions use a market value definition that begins with the: Lowest defendable price Most probable price Highest possible price Most reasonable price

Most probable price

Revaluation lease

A general term representing a compound interest rate used to convert expected future cash flow into a present value estimate is: Discount rate Sinking fund Annuity capitalization Overall internal rate

Discount rate

Typically, the first step in valuing a partial interest is to: Determine a capitalization rate Estimate future value of the cash flows Determine the discount Value the entire property

Value the entire property

USPAP says that an appraiser is expected to be at least as knowledgeable about the market for the type of property appraised as the typical _________. Market participants Brokers Sellers Buyers

Market participants

When using commercial DCF software, the appraiser should: Understand the algorithmic methods used Provide a link to the software in the report Cite the name and version in the report Use at least two different versions from different vendors

Cite the name and version in the report

A property is owned by joint tenants. One of the parties dies. The demised party’s interest: Reverts to the grantor Goes to the other joint tenant Becomes part of the demised party’s estate Becomes government property by escheat

Goes to the other joint tenant

Rights purchased or acquired through condemnation that allow aircraft to fly at low elevations are called _____________. Aviation variances Aero easements Aviation easements Glide angle easements

Aviation easements

The delta symbol means: Go back one Go forward one Direct capitalization is used Change in a variable

Change in a variable

An appraisal assignment would NOT include a Highest and Best Use analysis if it was for: Investment value Market value Value-in-use All of the above require Highest and Best Use analysis

Value-in-use

With DCF software, the appraiser should describe the software’s methods and ____________. Assumptions Reasoning Error ratio history Procedures

Assumptions

Critics of using “Net Present Value” cite that: The NPV concept is outdated There can be more than one IRR The NPV may not meet all investors’ needs The IRR is the method of choice

The NPV may not meet all investors’ needs

Beginning in the 1980s, hotel/motel developers began what significant trend? Furnishing all rooms with two double beds Adding additional vending machines Affiliating with a franchise Getting out of the restaurant business

Getting out of the restaurant business

All of the above must be included

Conservation easements are for how many years? For 10 years For 25 years For 99 years Permanent, unless otherwise stipulated in the easement documentation

Permanent, unless otherwise stipulated in the easement documentation

Yield Rate

An income adjustment or stabilization factor used by an appraiser to convert a stream of income on a curvilinear basis into its level equivalent is the: J factor K factor Y factor S factor

J factor

When two unmarried parties purchase a property, they are typically: Tenants in common Joint tenants Engaged in a limited partnership Tenants at sufferance

Tenants in common

If there were nine sales of comparable properties in the last six months, the absorption rate would be: 6 1.5 3.3 1

1.5

MIRR is the same as: IRR MGIM FAMB AIRR

AIRR Modified Internal Rate of Return is basically the same the Adjusted Internal Rate of Return.

In disputes of legal matters, the expenses related to attorney/legal fees are typically born by ____________. The Lessor The Lessee Both parties in equal shares The losing party

The losing party

Taxable profit from the sale of a parcel of real property would be called _________. Net Operating Income Net Residual Income Capital Gain Effective Gross Income

Capital Gain

“A yield rate used to convert future payments or receipts into present value” defines: Discount rate Reversion rate Capitalization rate Sinking fund

Discount rate

A railroad track can be a positive impact on value in the appraisal of: Bed and breakfast hotels Shopping centers Industrial buildings Agricultural properties

Industrial buildings

A change in total property value is signified by: Beta Sigma Gamma Delta

Delta

Occupancy rates are terms used most commonly in what type of property? Agricultural Free-standing single unit Industrial Hotel/motel

Hotel/motel

In reconstructing an operating statement, what type of expense is one that accountants use, but appraisers do not? Depreciation Pest control Security Utilities

Depreciation

The mortgage coefficient is signified by: V CM MC C

If market rent is greater than contract rent, the leasehold value is _________. Equal to leased fee A negative A positive Of no value

A positive

The reporting of the Scope of Work should be included in which part of the appraisal report? The transmittal letter The summary of important facts The addenda Any place

Any place

Dividing the difference between the amount borrowed and the amount paid back by the original loan amount is ___________. Leased fee value Time value Overall rate Discount rate

Discount rate

The commonality of the J Factor and the K Factor is that they both: Change the mortgage rate Change the loan-to-value ratio Stabilize the sinking fund factor Stabilize income

Stabilize income

The section of an appraisal report that describes what an appraiser did do, as well as what the appraiser did not do, is the: Scope of Work Description Summary of Important Facts Letter of Transmittal Data Presentation

Scope of Work Description

When management fees are a percentage, they are generally: 1 to 3% 3 to 7% 5 to 9% 7 to 12%

3 to 7%

The concept that the value of a particular component is measured as the amount that its absence would detract from the value of the whole is _________. Contribution Substitution Conformity Law of Increasing Returns

Contribution

New construction hotel/motel appraisal assignments are initially concerned with what key factor? Local room rates Absorption rate Land to building ratio Room type ratio

Absorption rate

All of the following are major parts of a narrative report EXCEPT the: Problem identification Data presentation Appraiser’s credentials Addenda

Appraiser’s credentials

In which type of assignment must a certification be included? Commercial real property appraisals Appraisal reviews All of the above Residential real property appraisals

All of the above

The difference between the abbreviations BTCF and ATCF is that: One is about cash flow and the other is about capital funding One involves real property taxes; the other, income taxes One is before and one is after No difference; they are interchangeable

One is before and one is after

Why a city, or part of a city, is in a specific location is a function of: Siting factors Architectural design Site selection First in sets the pattern

Siting factors

The estate that has the right to use an easement is referred to as the: Owner’s estate Dominant estate Servient estate Easement estate

Dominant estate

A national organization involved with office buildings is: BOFA BMOA BOMA BAOM

BOMA

Creating a number that is between two known numbers in an Ellwood factor table text is an example of: Weighted mean Interpolation Extrapolation Disintermediation

Interpolation

With DCF software, the appraiser should describe the software’s methods and ____________. Assumptions Reasoning Error ratio history Procedures

Assumptions

Calculating a number that is beyond a known range of numbers on which the calculation is based is an example of _____________. Weighted mean Interpolation Extrapolation Disintermediation

Extrapolation

Marketability studies address: Absorption of the property into the market Market lease rates Analysis of comparable sales A Cost-Benefit analysis

Absorption of the property into the market

The appraiser identifies the period required for cumulative income to equal initial investment as the: Cash Recovery period Investment Recovery period Net Present Value Payback Period

Payback Period

Plus or minus two standard deviations would encompass what percentage range on a normal distribution curve? 25% 33% 67% 95%

95%

Another term appraisers use for a step-up lease is: Percentage lease Multi-story building lease Changing index lease Graduated payment lease

Graduated payment lease

The type of floor covering with the longest high-end life expectancy is: Carpet Linoleum Vinyl Wood laminate

Wood laminate

Parking lots in condominium office complexes are considered: Chattel Conveyed by easement Common elements Conveniences in common

Common elements hey would be part of the common elements owned and maintained by the association.

The operating expense figures assume that the management is: A professional licensed company Typical of the market area Prudent and competent Bonded and insured

Prudent and competent

Fees designed to offset the increased burden on infrastructure are what type of fees? Police and fire tax Development New construction Impact

Impact

Since the mid-1970s, appraisers have had to give extra consideration to: Environmental contamination Methods of transportation Construction materials Availability of water

Environmental contamination

A rate of return on capital usually expressed as a compound annual percentage rate is the _____________. Discount rate Yield rate Capitalization rate Annuity rate

Yield rate

The cost approach is often performed and reported first in an assignment because: The results can be used in other approaches It is the most important approach Tradition It comes first alphabetically

The results can be used in other approaches

Concessions can also contribute to: A. Expenses B. Collection Losses C. Increases in PGI D. Both A and B

D. Both A and B

If an appraiser finds that market rent is less than contract rent, the leased fee value compared to fee simple is: The same Less than Greater than Greater or less than

Greater than

The estate that has the right to use an easement is referred to as the: Owner’s estate Dominant estate Servient estate Easement estate

Dominant estate

When an appraiser performs an appraisal on a vacant acreage parcel and comparable sales are scarce, what is a common alternative? Subdivision Analysis Land Residual Technique Debt Coverage Ratio Sales Residual Technique

Subdivision Analysis

When the initial out-go is divided into the present value of the in-flows, that results in the: Alpha index Beta index Cash flow index Profitability index

Profitability index

The income classification after deduction of Vacancy and Collection Allowances is referred to as the __________. Potential Gross Income Effective Gross Income Net Operating Income Pre-Tax Cash Flow

Effective Gross Income

Tests to determine if an appraisal was done appropriately include all of the following EXCEPT: Met reviewer’s own standards Met peers’ actions Met intended user’s expectations Used recognized methods and techniques

Met reviewer’s own standards

Fees designed to offset the increased burden on infrastructure are what type of fees? Police and fire tax Development New construction Impact

Impact

The basic formula appraisers use for dealing with rates is: I ÷ R = V. R ÷ I = V. I x R = V. R x I = V.

I ÷ R = V.

The two types of Band of Investment methods appraisers use are: Debt Coverage Ratio and Depreciated Cost Mortgage Equity and Land-Building Mortgage Equity and Debt Coverage Ratio Land-Building and Depreciated Cost

Mortgage Equity and Land-Building

Of cleaning, decorating, painting, and pest control, which should an appraiser consider under Replacement Reserves? Cleaning Decorating Painting Pest control

Painting

The intended user’s expectations

The extra return demanded by investors because the projected cash flow might not happen is the ______________. Safe rate Market rate Demand rate Risk premium

Risk premium

When reversion cap rates are used, they should reflect investor expectations considering which of the following items: Asset type Cash flow projections Age and condition All of the above should be considered

All of the above should be considered When reversion capitalization rates are used, they should reflect investor expectations considering the asset type, physical characteristics, age and condition, cash flow projections, and related factors. The projection or forecast period is a variable and should be based upon the same factors that typical market participants are using.”

Real Estate Taxes would be listed under what expense category? Fixed General Reserves Variable

Fixed

Valuing the income stream of a wasting asset is __________. Inwood Ellwood Hoskold Akerson

Hoskold

The shape of a parcel is typically least important to: Free-standing single unit Office buildings Agricultural property Shopping centers

Agricultural property

To add two numbers on an HP12C calculator, one enters the first number and then: [ + ] [ = ] [ENTER] The second number

[ENTER]

When an annuity has payments at the beginning of each period, it is referred to as a(n): Annuity in advance Annuity due Annuity appurtenant Pre-annuity

Annuity due

When the assignment is to determine market value, determination of the holding period is based upon: The typical investor A specific investor What your peers consider an appropriate holding period What intended users consider an appropriate holding period

The typical investor

The Scope of Work, as far as the acceptability of the degree of research, is determined by an appraiser’s peer’s actions and

intended user’s expectations.

Yield capitalization is a general term for income valuation methodologies that are derived from sales. future value estimates. not direct capitalization. on currently leased properties.

not direct capitalization.

Which of the following in NOT one of the basic steps of yield capitalization: Determine the holding period Calculate the cash flows Select an appropriate yield rate Determine the going-in overall capitalization rate

Determine the going-in overall capitalization rate

One of the results of the Tax Reform Act of 1986 was that: Longer holding periods were no longer desirable The advantage of shorter holding periods no longer existed Tax shelters were eliminated Investors were no longer permitted to purchase income producing properties

The advantage of shorter holding periods no longer existed

In yield capitalization, the yield rate and the overall capitalization rate function exactly the same. TRUE FALSE

FALSE

In what year did the tax law change to significantly impact the typical holding period duration?

1986

Which of the following would NOT be one of the basic steps involved in yield capitalization? Estimate holding period Determine estimated cash flows Determine the going in cap rate Calculate the present value of the cash flows and reversion

Determine the going in cap rate

Income Approach Flashcards

(314 cards)