Ch 9

Question 1

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.

Answer 1

Income Capitalization Approach

Question 2

Essentially, the income capitalization approach converts income into a lump sum indication of a property value. This can be done in one of two ways with two formulas:

Answer 2

1. the income can be divided by a rate;
   Value = Net Operating Income/ Rate
   or
2. the income can be multiplied by a multiplier.
   Value = Income X Multiplier

Question 3

Gross rent is usually expressed as a x figure, while gross income is an x figure.

Answer 3

monthly
annualized

Question 4

“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

Answer 4

Capitalization Rate (R)

Question 5

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

Answer 5

NOI
Net Operating Income

Question 6

“A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only one year’s income is used. Yield and value changes are implied but not explicitly identified. defines

Answer 6

Direct Capitalization

Question 7

“The relationship between a single year’s net operating income expectancy and the total
property price or value (Ro= lo No). defines

Answer 7

Overall Capitalization Rate (Ro)

Overall Rate = Overall Income / Overall Value

Question 8

What if the income was $48,543 and the appropriate capitalization rate was 12.4%. What is the value?

Answer 8

$391,476 ($48,543 /.124).

Question 9

A subject property has a net operating income (NOi) of $80,000. A comparable sale sold for $525,000, and it had a verified NOi of $65,000. What is the value of the subject?

Answer 9

The capitalization rate (Ro)is extracted from the comparable sale as follows:
Ro= I/ V
Ro= $65,000 / $525,000
Ro = .1238 (or 12.38%)

The indicated value of the subject property based on a Ro of 12.38% is calculated as follows:
V=I/ R
V = $80,000 / 0.1238 (or 12.38%)
V = $646,203 (or $646,000 rounded)

Question 10

“An amount paid for the use of land, improvements or a capital good. “ defines

Answer 10

Rent

Question 11

“The actual rental income specified in a lease.” defines

Answer 11

Contract Rent

Question 12

“Income due under existing leases.” defines

Answer 12

Scheduled Rent

Question 13

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

Answer 13

Market Rent

Question 14

“Total base rent, or minimum rent stipulated in a lease, over the specified lease term minus rent concessions; the rent that is effectively paid by a tenant net of financial concessions provided by a landlord.” defines

Answer 14

Effective Rent

Question 15

“The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord (lessor) and may reflect unusual management, unknowledgeable or unusually motivated parties, a lease execution in an earlier, stronger rental market, or an agreement of the parties. “ defines

Answer 15

Excess Rent

Question 16

“The amount by which market rent exceeds contract rent at the time of the appraisal; created by a lease favorable to the tenant, resulting in a positive leasehold, and may reflect uninformed parties, special relationships, inferior management, a lease executed in a weaker rental market, or concessions agreed to by the parties. “ defines

Answer 16

Deficit Rent

Question 17

“Rental income received in accordance with the terms of a percentage lease; typically derived from retail store and restaurant tenants and based on a certain percentage of their gross sales.” defines

Answer 17

Percentage Rent

Question 18

“The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses.” defines

Answer 18

Operating Expenses

Question 19

“Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant. defines

Answer 19

Fixed Expenses

Question 20

“Operating expenses that generally vary with the level of occupancy or the extent of services
provided. defines

Answer 20

Variable Expenses

Question 21

Examples of Fixed Expenses

Answer 21

Real Estate Taxes and insurance

Question 22

Examples of Variable Expenses

Answer 22

Management Fee
Utilities
Payroll
Decorating
Supplies
Maintenance/Repair
Trash Removal
Miscellaneous
Replacement Allowance (for everything that is typical for this business like roof, paved areas, painting, carpets, kitchen equipment, mechanicals, safety guards)

Question 23

“The sum of all fixed and variable operating expenses and the replacement allowance cited
in the appraiser’s operating expense estimate.” defines

Answer 23

Total Operating Expenses

Question 24

Formula NOI

Answer 24

Gross Annual Rental (Potential Gross Income, or PGI)
+ Other Income
- Vacancy/Credit Loss (V&C)
= Effective Gross Income (EGI)
- Operating Expenses (TOE)
= Net Operating Income (NOI)

Question 25

“The total income attributable to property at full occupancy before vacancy and operating
expenses are deducted. “ defines

Answer 25

PGI
Potential Gross Income

Question 26

“All income generated in the operation of the property that is not derived directly from
space rental.” defines

Answer 26

Other Income

Question 27

“A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss. “ defines

Answer 27

Vacancy and collection loss

Question 28

“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

Answer 28

Effective Gross Income = EGI

more important indicator than PGI

Question 29

Some tenants may take off in the middle of the night without paying their rent =

Answer 29

credit loss or collection loss

Question 30

A property owner of a 12-unit building does not spend any money on painting and decorating over a three-year period, and therefore includes no expenses for painting and decorating on his operating expense sheet that he provides to the appraiser. What should the appraiser do?

Answer 30

Calculate the expenses for painting and decorating and include them in the appraisal.

Question 31

Which Expenses should not be included in the Operating expenses?

Answer 31

Income Taxes
Depreciation
Financing & Debt Service
Capital Improvements

Question 32

“A method used to convert future benefits into present value by
1)discounting each future benefit at an appropriate yield rate, or
2) developing an overall rate that explicitly reflects the investment’s income pattern, holding period, value change, and yield rate.” defines

Answer 32

Yield Capitalization

Question 33

Difference between Yield Capitalization and Direct Capitalization

Answer 33

Direct capitalization is a “snapshot”, i.e., a single-year’s income was converted into an indication of value.
Yield capitalization takes into account the income over a holding period, which could be several years in duration.