chapter 16 income

Question 1

Which of the following statements regarding the comparative approach is FALSE?

1. The income approach is similar to the comparative approach; both rely on market evidence from similar properties.
2. The comparative approach reflects market behaviour and requires a minimum of subjective opinion from the appraiser.
3. The residual method is only applicable when determining the highest and best use of the land as vacant.
4. The cost approach assumes that the improvement’s replacement cost new may exceed its market value.

Answer 1

Correct Answer: 3

Option (3) is false because the residual method may also be used to determine the value of the building as the residual amount. In this case, the land value may be known using the comparative approach and the value of the improvements is unknown. Option (1) is true because instead of comparing similar sales, the income approach compares revenues and expenses relative to the sale prices of similar properties. Option (2) is true, market data reflects market expectations; the proviso is that the quality of, and market data selected, is based on the appraiser’s experience and judgement. Option (4) is true because the improvement’s replacement cost new may exceed its market value since the cost of producing the asset may not directly relate to market expectations. An example is in the case where an individual with a personal preference to have their house built using triple glazed windows vs. double glazed windows (standard in the marketplace).

Question 2

Which of the following statements is/are TRUE?

A. An appraiser owes a duty of care to those persons who he/she can foresee are likely to take action based on the appraisal report.

B. Soil conditions in a neighbourhood should not be overlooked in cases where they may influence the type of structure that can be constructed.

C. A government policy which allows homeowners to deduct interest paid on a mortgage from their taxable income would change the demand for real property across the country.

D. The supply of real property can be increased or decreased by changing the use of a parcel of real property.

1. A only
2. B and D only
3. A, C, and D only
4. All of the above

Answer 2

Correct Answer: 4

Statements A, B, C and D are true. Therefore, option (4) is correct.

Question 3

Consider a mid-size warehouse situated in downtown Vancouver, between the Scotiabank and HSBC buildings, both of which are skyscrapers. The warehouse is rented for storage space on a monthly basis, earning $60,000 in income per year. Which of the following options as an estimate of value would be most suitable for this property?

1. Comparative approach
2. Residual method
3. Income approach
4. Cost approach

Answer 3

Correct Answer: 2

Since the warehouse is located between two skyscrapers in downtown Vancouver and earns only $60,000 per year, it is unlikely that the warehouse represents the property’s highest and best use. In this case, the property possesses great potential for redevelopment. Thus, option (2) is correct, as the residual method will provide the most accurate estimate of value.

Question 4

Kathy Myers, a professional appraiser, recently moved to a small suburban residential area. She has been asked to appraise a historic church which is located in the middle of a residential neighbourhood. Which approach of appraisal is Kathy most likely to use?

1. Income approach
2. Comparative approach
3. Investment approach
4. Cost approach

Answer 4

Correct Answer: 4

An appraiser who is asked to find the market value of a church would not be able to use the comparative or investment approaches due to the lack of available market data. The cost approach which determines the value of a property by adding the market value of the site to the cost of replacing the existing building, would be the most applicable method to use under these circumstances.

Question 5

Axel owns and operates a warehouse located on the perimeter of a small town. The land is zoned I3, light industrial. The net operating income (NOI) was the highest when he commenced his business operations some 8 years ago but has been falling ever since. He is reconsidering the property’s use. His research of the market evidences a growing demand for rental properties due in part to a university opening up within 8 km of the warehouse. Axel believes he can realize the highest net return of his property if the warehouse is converted into a rental apartment building. Which of the following statements is TRUE?

1. The rental apartment building represents the property’s highest and best use.
2. Axel’s warehouse possesses latent value.
3. The zoning restriction may prevent development or use that would yield the greatest return to the land.
4. Since the NOI has been falling, the warehouse is not its highest and best use.

Answer 5

Correct Answer: 3

Option (3) is true; whether or not a zoning bylaw can be removed or changed impacts a property’s highest and best use, and/or its development potential. Therefore, Options (1) and (2) are false. Option (4) is false because a falling NOI does not determine a property’s highest and best use, rather it is the most profitable, legal use that yields the highest net return to the land.