Chapter 23 - The Income or Investment Method of Appraisal

Question 1

The general framework for calculating net operating income is as follows:
 Gross Potential Revenue
 \+ Other Income
 -  Vacancy and Bad debt allowance
 = \_\_\_\_\_\_\_\_\_\_\_
 -  \_\_\_\_\_\_\_\_\_\_\_
 = NOI

Answer 1

The general framework for calculating net operating income is as follows:
 Gross Potential Revenue
 \+ Other Income
 -  Vacancy and Bad debt allowance
 = Gross Realized Revenue
 -  Operating Expenses
 = NOI

Question 2

Real property taxes are an example of a ______ expense.

Answer 2

Real property taxes are an example of a fixed expense.

Question 3

Gross realized revenue is calculated by taking gross _________ revenue and ____________ an allowance for vacancy and ______ debt.

Answer 3

Gross realized revenue is calculated by taking gross potential revenue and subtracting an allowance for vacancy and bad debt.

Question 4

Name the four items that are omitted in calculating net operating income.

Answer 4

Name the four items that are omitted in calculating net operating income.

Answer:
depreciation, income tax, capital cost allowance, debt service

Question 5

Define capitalization rate and explain how it can be estimated.

Answer 5

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 6

The income method, also called the __________ method, is an appraisal method that is typically used for income-producing properties. It converts the income stream produced by the property into a _________ value for the property by using a ____________ rate.

Answer 6

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 7

Expenses that must be paid regardless of the level of occupancy and use of the property are referred as ____________ 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 ____________ expenses.

Answer 7

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 8

How should the vacancy allowance be determined?

Answer 8

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

Define gross potential rent.

Answer 9

Define gross potential rent.

Answer:

Gross potential rent is the rent which would be collected if all units were leased at market rents.

Question 10

Which of the following is TRUE?

(1) Gross potential revenue includes income from other sources such as parking income and laundry income.
(2) Gross potential revenue is found by subtracting operating expenses from gross realized revenue.

Answer 10

Answer:

(1) Gross potential revenue includes income from other sources such as parking income and laundry income.