Chapter 17- The Income Or Investment Approach Of Appraisal

Question 1

GROSS REALIZED REVENUE is calculated by taking the gross POTENTIAL revenue and SUBTRACTING an allowance for vacancy and BAD debt.

Question 2

GROSS POTENTIAL RENT is the rent which would be collected if all units were leased at Market rents.

Question 3

To be effective, digital signatures must be “unforgivable” and therefore use a technology called CRYPTOGRAPHY

Question 4

The general framework for calculating net operating income is as follows:
Gross Potential Revenue 
\+ other Income 
- vacancy and bad debt expenses 
= GROSS REALIZED REVENUE 
- OPERATING EXPENSES 
= NOI

Question 5

The PERSONAL INFORMATION PROTECTION ACT regulates the way private sector organizations collect, use, keep secure and disclose personal information in BC

PIPA

Question 6

Name the four items that are omitted in calculating NOI

Depreciation
Income Tax
Capital Cost Allowance CCA
Debt Service

Question 7

For important transaction-related data, it is advisable to retain hard copies

True
Especially if they contain written notation, signatures or initials

Question 8

How should the vacancy allowance be determined?

The vacancy allowance should be determined by the long term vacancy rates in the area; that is, the vacancies in comparable buildings modified, if necessary, by expected future trends.

Question 9

Which of the following is True?
1)Gross potential revenue includes income from other sources such as parking income and laundry income

Gross potential Revenue includes Parking and laundry income

Question 10

The INCOME METHOD, also called the INVESTMENT method, is an appraisal method that is typically used for income producing properties. It converts the income stream produced by the property into a MARKET value for the property by using a CAPITALIZATION rate.

Question 11

Define CAPITALIZATION RATE and explain how it can be estimated

Capitalization rate is the return an investor requires for investing in a property to receive the annual net operating income flows. It can be estimated from similar properties by dividing their estimated net operating incomes by the prices at which the properties sell.

Question 12

Expenses that must be paid regardless of the level of occupancy and use of the property are referred as FIXED expenses, whereas expenses that will vary based upon the nature of the occupancy of the property and the amount of lease activity required to maintain full occupancy, are referred as VARIABLE expenses.

Question 13

Income Method — Yield Method

Capitalization Rate

Yield =. NOI DIVIDED BY SALES PRICE (of similar Property)

SALES price .= NOI DIVIDED BY CAPITALIZATION RATE

Question 14

Example: Market Cap Rate is 7.45%, Annual Net Operating Income is 148,140

$148,140
————-
.0745. = 1,988,456 Sales Price

Question 15

GROSS POTENTIAL REVENUE (GPR)
LESS: Vacancy and Bad Debt
————————————————-
= GROSS REALIZED REVENUE 
LESS: Operating Expenses
————————————————-
=   Net Operating Income

Question 16

Example 
GPR = 115,000
Vacancy & Bad Debt = 4%
Cap Rate = 15%
Immediate Repairs (if GIVEN) 6,000

GPR =                           115,000
Less V&BD 4%.                (4,600)
GRR.                              110,400
Less: Operating Exp.     (45,000)
Net Operating Inc =.    65,400

65,400/.15 = $436,000 Market Value.
436,000 less Repair 6000 = 430,000

Question 17

If Given Gross Realized Revenue then don’t deduct bad debt and Vacancy. Even if given.

You deduct Operating Expenses and Real Property Taxes is considered as Operating Expenses

Question 18

Which of the following is estimated using current rents paid on similar properties based on 100% Occupancy?

1/ Gross Potential Revenue GPR IS correct
2/ Gross Realized Revenue
3/ Effective Gross Income
4/ Net Operating Income

Question 19

Replacement Reserves (Annual Sum)

— provides for a periodic replacement of building components that wear out more rapidly than the building itself.

— it replaces equipment with relatively short life. Such as stoves, refrigerators, washing machines, carpeting

Question 20

Which of the following describes a Replacement Reserves?

2/ it’s an annual sum set aside for replacement, repairs, and renovations

The answer is #2 replacement of equipment etc. because it is an Annual Sum.

Question 21

In Appraisal an Annual Sum set aside for replacement, repairs, and renovations is best known as a:
1/ special fund
2/ Cyclic add l Repair
3/ Replacement Reserve. Correct Answer. 
4/ Capitalization Rate

Question 22

Determining Market value of Commercial Property

Interest on mortgage is NOT operating expense

Types of expenses considered as operating
— Reserve replacement of equipment
— property taxes
— advertising vacancies suites