IAAO - Chp 4

Question 1

What does the EAT formula stand for?

Answer 1

E = Effective Tax Rate
A = Assessment Level/Ratio
T = Tax Rate

Question 2

Calculate: 80 mills per $1

Answer 2

80 / 1,000 = 0.08

Mills = 1000

Question 3

Calculate: 0.08 per $1

Answer 3

0.08 / 1 = 0.08

If youre not dealing with mills, just divide the numbers

Question 4

Find the Effective Tax Rate:

Current Taxes: $4,000
Property Value: $200,000

Answer 4

$4,000 / $200,000

Question 5

Find the the Effective Tax Rate:

Assessment Level: 40%
Tax Rate: $5 per hundred

Answer 5

Use the EAT formula

.40 (A) x 5/100 (T)

.4 x .05 = 0.02 or 2%

Question 6

Property sold recently for $360,000. The assessment level in this area is 50%. The prior tax bill for the Smiths was $5400. What is the Effective Tax Rate?

Answer 6

$5,400 / $360,000

Question 7

Property is located in an area that was appraised last year. The current assessment level is 50%. The current tax rate is $3.00 per hundred. What is the effective tax rate

Answer 7

Use the EAT formula since theres no sale price

50% x (3/100)
.5 x .03 = 0.015 or 1.5%

Question 8

You are comparing subject properties to recent sale prices of similar lots. You are able to confirm certain characteristics are the similar - Topography, Expense Ratio, Shape, etc. What are the steps to calculate the estimate of value using direct capitalization?

Answer 8

1. Find the NOI of the sale prices
2. Use the NOI to find the overall recapture rate (NOI / Sale Price)
3. Use that overall recapture to be able to apply that to your subject. If one sale is 0.64 and the other sale is 0.65, use 0.65.
4. Add the Effective Tax Rate, if necessary (lets say, .2)
5. Find NOI for subject propert (say, $161,000), then divide using IRV formula ($161,000 / 0.85) = $1,900,000

Question 9

You are comparing properties and need to add tax expenses to the equation bc the properties have different tax rates. How do you find the tax expense?

Answer 9

Sale Price x ETR = tax expense

Question 10

You are comparing properties and need to add tax expenses to the equation. You have come up with the tax expense. What do you need to find the capitalization rate?

Answer 10

NOI - tax expenses = NOI including tax expenses

NOI including tax expenses / Sale Price

Question 11

Your subject property has a NOI of $434,000, which includes property taxes.

A property comparable to your subject is rented at a market rate and has a NOI of $450,000 with annual debt service of $360,000. The property was financed with a loan for 70% of its value, at 8%, for 20 years. The annual mortgage constant for this loan is 10%.

What is the debt coverage ratio?

Answer 11

$450,000 / $360,000 = 1.25

Question 12

Your subject property has a NOI of $434,000, which includes property taxes.

A property comparable to your subject is rented at a market rate and has a NOI of $450,000 with annual debt service of $360,000. The property was financed with a loan for 70% of its value, at 8%, for 20 years. The annual mortgage constant for this loan is 10%.

What is the overall cap rate?

Answer 12

DCR (1.25) x Rm (.10) x M (.70) = 8.75%

Question 13

Your subject property has a NOI of $434,000, which includes property taxes.

A property comparable to your subject is rented at a market rate and has a NOI of $450,000 with annual debt service of $360,000. The property was financed with a loan for 70% of its value, at 8%, for 20 years. The annual mortgage constant for this loan is 10%.

What is the value of the subject property?

Answer 13

34,000 / 0.0875

Question 14

Income multipliers are typically applied to the EGI. Can you apply the formula using Potential Gross Income?

Answer 14

Yes, as long as it is done consistently in its application.

Question 15

Whats the difference between GRM and GIM?

Answer 15

GRM: Gross RENT Multiplier. It is MONTHLY
GIM: Annually

Question 16

_____ is a method of converting an estimate of a single years income into value in one direct step

Answer 16

Direct Capitalization

Question 17

The two generic formulas used in direct cap. are?

Answer 17

IRV
VIF

Question 18

________ is a method of converting future net benefits into present value where each future net benefit is discounted at a proper yield rate (discount rate)

Answer 18

Yield Capitalization

Question 19

The _________ shows the periodic payment necessary to amortize a loan at a specified interest rate over a specific number of periods. It is also known as the installment to amortize $1.

Answer 19

Partial Payment Factor

Question 20

The _____ shows the present worth of a series of future payments or deposits. It is also known as the Inwood coefficient.

Answer 20

Reversion Factor

Question 21

The _____ shows the present worth of a single future payment or deposit of $1

Answer 21

Present worth of $1

Question 22

What is the formula for Gross Income Multipliet?

Answer 22

VIF

Value / Gross or effective Income

Question 23

A property sold for 2 million. The potential gross income was $270,000 with a V + C of $20,000.

What is the effective gross income multiplier?

Answer 23

1. Find EGI ($250,000)
2. Apply VIF formula ($2,000,000 / $250,000)

Question 24

When property is being appraised for ad valorem tax purposes, the _____ must be included as part of the overall cap rate

Answer 24

Effective Tax Rate

Question 25

List four types of amenities that must be considered when selecting vacant land sales

Answer 25

Location
Restrictions
Investment
Utility

Question 26

List four major categories of required comparability that must be considered when selecting improved property sales to use in the development of an overall cap rate

Answer 26

Amenities
Land to improvement ratios
Expense Ratios
Remaining Economic Life

Question 27

____ is different from yield capitalization, in that it does no directly consider the individual cash flows beyond the first year

Answer 27

Direct Capitalization