Ch 14 Flashcards
“Specific appraisal techniques applied to develop a value indication for a property based on its earning capability and calculated by the capitalization of property income.” defines
The income capitalization approach
Income Capitalization Approach formulas:
Value = Income / Rate
Value = Income X Multiplier
“Total income from a property before deducting any expenses, customarily stated on an annual basis.” defines
Gross income
Gross income is simply the total of the rents for the whole year, plus any other income from the operation of the property.
“A ratio of one year’s net operating income provided by an asset to the value of the asset; used to convert income into value in the application of the income capitalization approach.” defines
Capitalization rate
“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. defines
Net operating income (NOI)
Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization).”
“The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate.” defines
Discounted cash flow analysis
“The relationship or ratio between the sale price or value of a property and its periodic gross rental income.” defines
A gross rent multiplier (GRM)
GRMs are derived by dividing the sales price of a property by its gross monthly unfurnished market rent at the time of sale.
Then the GRMs are analyzed and reconciled into an appropriate multiplier that can be used to develop an indication of value by the income capitalization approach. The GRM is multiplied by the market rent of the subject property.
“an amount paid for the use of land, improvements or a capital good.” defines
Rent
“the actual rental income specified in a lease.” defines
Contract rent
“the income due under existing leases.” defines
Scheduled rent
“The most probable rent that a property should bring in a competitive and open market reflecting the conditions and restrictions of a specified lease agreement, including the rental adjustment and revaluation, permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements (TIs).” defines
Market rent
GIM stands for
Gross income multipliers
Differences between GRM and GIM?
GRM:
one- to four-unit residential properties
just rent, no other sources of income
monthly
GIM:
larger multi-unit residential properties and non-residential income-producing properties.
Income includes rent and other types of income
annual
“The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.” defines
Potential gross income (PGI)
“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.” defines
Effective gross income (EGI)
