Chapter 4

Question 1

IRV (TBAR) formula

Answer 1

Question 2

Alpha Leasing offered an incentive to a potential tenant by providing a 15%
rent discount over the first six months of the lease. If the rent is $30,000
over this period, how much is the prospective tenant going to save? (IRV)

Answer 2

$4,500

Question 3

The state highway department has acquired 20,000 square feet of land
through condemnation. If the land taken is 5% of the total parcel, what is
the size of the entire site? (IRV)

Answer 3

400,000

Question 4

Jamal purchased a property three years ago for $750,000 that has since
appreciated in value by 20%. What is the current value? (IRV)

Answer 4

$900,000

Question 5

I = ____

Answer 5

Income: The income used in capitalization is a very specific type of income

Question 6

R = _____

Answer 6

Rate: The rate used in capitalization is also a specific type of rate. If you are
seeking the value of the property (that is, both land and improvements) based
on NOI (IO), then the rate used is referred to as an overall rate (RO)

Question 7

F=____

Answer 7

Factor: A factor is used instead of a capitalization rate when an appraiser is
employing the VIF formula to capitalize income. Factors are not divided
into income, but instead are used to multiply the income to derive a
value—hence the reason they are called multiplier

Question 8

Reciprocal

Answer 8

A reciprocal is an element of a mathematical set that when
multiplied by a given element yields the identity element

Example. If a capitalization rate (R) is 6.25%, what is its
corresponding factor? The answer can be found by taking the
reciprocal of 6.25%.

1 / 0.0625 = 16, so 16 is the factor that corresponds to a
capitalization rate of 6.25%, and the reciprocal of 16 is 6.25%
(that is, 1 / 16 = 0.0625)

Question 9

V=____

Answer 9

Value: The value derived from the capitalization process should be qualified,
particularly when using land value or building value

Question 10

A 16-unit apartment building has a potential gross income of $124,800.
The vacancy rate is 5% and the operating expenses and replacement
allowance is $40,000. If the overall capitalization rate is 8.25%, what is
the value by direct capitalization?

Answer 10

$124,800 PGI − vacancy loss of $6,240 = $118,560 EGI

Shortcut: $124,800 PGI × 0.95 occupancy = $118,560 EGI

$118,560 EGI − $40,000 expenses = $78,560 NOI

Answer: $952,242.42

Question 11

Garcia is analyzing the value of a six-unit rental property in a residential
district. The PGI is $50,400 and sales indicate a potential gross income
multiplier (PGIM) of 8.75. Based on this data, what is the value of the
property? (VIF)

Answer 11

$441,000

Question 12

VIF:

Answer 12

Question 13

Answer 13

$744,720

Question 14

How does an appraiser decide whether to use IRV or VIF?

Answer 14

determined by the type of property and the availability of market
data. If the appraiser has good data on income and expenses for the
subject property and competing properties, IRV is used. In some property
types, the most accurate indicator of income is PGI or EGI. In that case,
VIF would be chosen to capitalize income

Question 15

Gross income multiplier (GIM)

Answer 15

This is the ratio between the sale price (or value) of a property and its effective gross income

Question 16

Use of gross income multipliers:

Answer 16

GIM is used in residential properties with five or more units and in
some commercial properties (for example, hotels) as a method of direct
capitalization

Question 17

Operating expense ratio (OER)

Answer 17

The ratio of total operating expenses
to effective gross income (TOE / EGI); the complement of the net
income ratio, i.e., OER = 1 – NIR

Question 18

Calculating the GIM:

Answer 18

sale price/annualized income

Question 19

Gross rent multiplier (GRM)

Answer 19

This is a similar ratio to GIM, but it applies to rental income only

Question 20

If market research indicates an NOI of $270,000, what is the indicated
value of the subject property using direct capitalization?

Answer 20

$2,919,000

Question 21

A three-unit residential property sells for $232,000, two units rent for $725 per
month, and one unit rents for $550 per month. What is the monthly rent for the
property?

Also, what is the GRM for this sale property?

Answer 21

$725 + $725 + 550 = $2,000 monthly rent

$232,000 / $2,000 = 116 GRM (use the VIF formula)

Question 22

After analyzing market data of comparable rentals, a GRM of 98 is derived. If the
monthly rent for the subject property is $4,000, what is the indicated value?

Answer 22

$4,000 × 98 = $392,000

Question 23

If the capitalization rate (R) is 9.5%, what is the equivalent factor (that is,
multiplier)?

Answer 23

1 / 0.095 = 10.526315, or 10.53 (take the reciprocal of the rate)

Question 24

IO is $112,500 and RO is 7.5%. What is the indicated value of the property?

Answer 24

$112,500 / 0.075 = $1,500,000 value

Question 25

If a property has annual gross income of $80,000 and the gross income multiplier
is 11.5, what is the indicated value of the property?

Answer 25

$80,000 × 11.5 = $920,000 value

Question 26

An appraiser is analyzing a sale that sold for $1,400,000. If the indicated NOI for
the property is $126,000, what is the overall capitalization rate?

Answer 26

$126,000 / $1,400,000 = 0.09 (or 9%) RO

Question 27

An appraiser is analyzing a sale that sold for $1,500,000. If the EGI for the
property is $200,000, what is the EGIM?

Answer 27

$1,500,000 / $200,000 = 7.5 EGIM

Question 28

PGIM (Potential Gross Income Multiplier)