Income Approach 1 Modules 1 to 22 Flashcards
Direct Capitalization
Module 1 Project market and contract rents are examples of: a. Externalities b. Substitution c. Change d. Anticipation
d. Anticipation
Module 1
How is capitalization defined?
a. Contribution of a particular component to the value of the whole.
b. Conversion of income to value
c. Most probable selling price
d. Conversion of benefits received in the future to present value
b. Conversion of income to value
Module 1 Which principle refers to the amount that the absence of a component of value would detract from the value of the whole? a. substitution b. contribution c. anticipation d. externalities
b. contribution
Module 1 A good example of the principle of supply and demand is: a. Land and building b. Mortgage and equity c. Anticipation and change d. Market rents
d. Market rents
Module 1
The two general methods of capitalization are called
a. yield and property model
b. discounted cash flow analysis and yield
c. Multiplier and direct
d. Direct and yield
d. Direct and yeild
Module 1 A small retail property has a net operating income of $250,000 and the appropriate capitalization rate is 8%. What type of capitalization rate should be used to solve this problem? a. Direct Capitalization b. Value Capitalization c. Yield Capitalization d. Discount Capitalization
a. Direct Capitalization
Module 1 A single years income is converted into value using a. capitalization rate b. change c. income rates d. yield
a. capitalization rate
Module 1 What is the value of a property with a $100,000 potential gross income and potential gross income multiplier of 4.0? a. $500,000 b. $400,000 c. $200,000 d. $300,000
b. $400,000
V = I x M
Module 1 A small retail property has a net operating income of $250,000 and the appropriate capitalization rate is 8%. What is the symbol for which we are solving? a. Yield Rate Y b. Value V c. Capitalization Rate R d. Income I
b. Value V
Module 1 Which of the following is sometimes called a factor? a. discount rate b. multiplier c. capitalization rate d. yield rate
b. multiplier
Module 2
Which of the following is not a reason someone would want more than $1,000 to wait for the money?
a. Passage of time, during which person has no use of the money
b. risk of not receiving it
c. erosion of purchasing power
d. a dollar in the future is worth more than receiving a dollar now
d. a dollar in the future is worth more than receiving a dollar now.
Module 2 What is the effective annual interest rate for a $1,000 loan at 6% nominal interest if the compounding frequency is daily? a. 6.090% b. 6.168% c. 6.00% d. 6.183%
b. 6.183%
Nominal interest rate: Stated or contract rate, an interest rate, usually annual, that does not necessarily correspond to the effective or compound rate. This is an annual rate.
1. 6/365 = .0164%
2. n=365, i=.0164, PV= 1,000 FV=? = 1,061.68
3. 1000 - 1061.69 = 61.68 (earned interest)
4. 61.68/1000 = 6.168%
Module 2 Assume a five year investment period and in initial investment of $1,000 that pays 6% interest annually. Which of the following represents the total interest paid over the five year period? a. $262.48 b. $348.97 c. $418.52 d. $338.23
d. $338.23
n= 5, i=6, PV=1,000, FV? = $1,338.23
1,338.23 - 1,000 = 338.23
Module 2 Assume a five year investment period and an initial investment of $1,000 that pays 6% interest annually. Which of the following represents the balance in the account at the end of the five year investment? a. $1,191.02 b. $1,338.23 c. $1,123.60 d. $1,262.48
b. $1,338.23
Module 2 Cash flow (of CF) is a term used to describe a. downstream money b. single amounts of money c. money flow d. multiple amounts of money
d. multiple amounts of money
Module 2
An investor invests $1,000 today and receives $1,060 in 1 year. What does the $60 represent to the investor?
a. principle
b. return on his investment
c. return on and return of his investment
d. return of his investment
b. return on his investment
Module 2 Underlying compound interest that holds $1 received today is worth more than $1 received in the future due to cost, inflation, and the certainty of payment is referred to as a. parlay b. time value of money c. double interest d. extraction
b. time value of money
Module 2 Which of the following describes the Inwood factor? a. Present value of one b. Future value of one c. Installment to amortize one d. Present value of one per period
a. Present value of one
Module 2 What is the future value after 5 years for a $1,000 investment made today and earning 3% interest? a. $862.61 b. $1,161.62 c. $5,309.13 d. $1,159.27
d. $1,159.27
n =5, i = 3, PV = 1,000, FV = ? = $1,159.27
Module 2 Which of the following describes the sinking fund factor? a. installment to amortize one b. future value of one c. future value of one per period d. present value of one per period
c. future value of one per period
Module 3 The lump sum benefit an investor receives or expects to receive at the termination of an investment describes a. present value b. reversion c. income in year n+1 d. capitalized value
d. reversion
Module 3 Which of the following refers to the reversion in the HP-12C Financial keys? a. PV b. PMT c. FV d. n
c. FV
Module 3 What is the present value of the right to receive $60,000 each year for 8 years if the required yield rate is 4% if payments are in advance? a. $420,1123 b. $436,928 c. $403,964 d. $214,625
c. $403,964
PMT= 60,000, n = 8, i = 4, PV = ? = 403,964
Module 3 Discounting is a procedure used to convert periodic incomes, cash flows, and reversions into a. future value b. past value c. temporary value d. present vale
d. present value
Module 3 Hoe much should an investor pay today for the right to receive $50,000 per year each year for the next 10 years if he desires to yield 8%? a. $23,159 b. $266,749 c. $335,504 d. $500,000
c. $335,504
PMT = 50,000 n = 10, i = 8, PV = ? = 335,504
Module 3 Contract of regular payment of predictable amount is known as a. Present value of one per period b. sinking fund c. reversion d. annuity
d. annuity
Module 3
Which of the following statements about an annuity is correct?
a. payment must be level
b. payments must be perpetual
c. payment must be received at the end of the period
d. payments must occur in regular predictable amounts
d. payments must occur in regular predictable amounts
Module 3 What are the monthly payments of a $250,000 mortgage loan amortized over 15 years at 8% interest, monthly compounding? a. $28,669 b. $2,433.95 c. $2,373.30 d. $2,389.13
d. $2,389.13
PV = $250,000, n = 15g, i = 8g, PMT = ? = 2,389.13
Module 3 What is the sinking fund factor at 9% yield rate and a 10 year holding period? a. 0.1558 b. 0.0736 c. 0.0604 d. 0.0658
d.0.0658
Sinking fund factor:
The compound interest factor that indicates the amount per period that will grow, with compound interest to $1 (or other unit of currency). Also known as the periodic payment to grow one and sometimes as the acronym SFF.
n = 10, i = 9, FV = 1, PMT = ? = 0.0658
Module 4 What is the present value of One per period at 5% interest for 8 years? a. 5.8666 b. 0.6806 c. 6.4632 d. 6.7864
c. 6.4632
i = 5, n = 8, PMT = 1, PV =? = 6.4632
Module 4 What is the future value of One per period if the term is 8 years and the interest rate is 5% a. 1.4775 b. 5.8666 c. 9.5491 d. 6.4632
a. 1.4775
n = 8, i = 5, PV = -1, FV = ? = 1.4775
Module 4 If the loan amount is $300,000 and the monthly payment is $2,315.45 for 25 years, what is the mortgage interest rate? a. 6.67% b. 9.26% c. 8.0% d. 7.86%
c. 8.0%
25gn, 300,000 CHS, PV, 2315.45 PMT Solve i enter, 12x = 8.00
Module 4 Module 4 Which of the following is the symbol for the loan amount? a. Mo b. Vo c. Rm d.Vm
d. Vm
Module 4 What is the loan balance on a mortgage with 10 years remaining if the interest rate is 8% monthly compounding, and the monthly payment is $1,834.41? a. $151,194 b. $147,708 c. $220,129 d. Not enough information to solve
a. $151,194 10gn 8gi 1,834.41 PMT PV = $151,194
Module 4 Not one of the six functions of One, \_\_\_\_\_ is a related factor that always expresses the total loan payment per year for a $1 loan based on the nominal interest rate. a. annual debt service b. sinking fund c. mortgage constant d. mortgage capitalization rate
d. mortgage capitalization rate
to calculate mortgage constatn
R= I/V or Rm= Im/Vm
Rm - the capitalization rate for debt, the ratio of the annual debt service to the principal amount of the mortgage loan, also known as the annual mortgage constant.
Module 4 Identify the function by the method listed below used to extract its value from the HP12C Calculator - 1 in PV solve for PMT a. Present value of one b. Future value of one c. Installment to ammortize one d. sinking fund factor
c. Installment to ammortize one
Six Functions of a Dollar
1. Amount of One/Future Value of One = 1 in PV Solve for FV
2. Present Value of One/Reversion Factor=1 in FV Solve for PV
3. Present Value of One Per Period/Level Annuity Factor= 1 in PMT Solve for PV
4. Amount of One Per Period/Sinking Fund Factor= 1 in PMT solve for FV
5. Sinking Fund Factor/Periodic Payment to Grow One= 1 in FV solve for PMT
6. Installment to ammortize one/Amortization factors=1 in PV solve for PMT
Module 4 Identify the function by the method listed below used to extract its value from the HP12C Calculator 1 in PV Solve for FV a. Future value of one per period b. Sinking fund factor c. Future value of one d. Present value of one
c. Future value of one
Module 4 A property is leased for $50,000 annual net income for 6 years. At the end of year six the property will be worth $650,000. What is the current value of the property if the appropriate discount rate is 9%? a. $774,387 b. $555,555 c. $611,870 d. $632,056
c. $611,870 50,000 PMT 6, n 650,000, FV 9, i PV - 611,869.70
Module 4 Identify the function by the method listed below used to extract its value from the HP12C calculator - 1 in FV Solve for PMT a. Sinking fund factor b. Installment to amortize one c. Future value of One per period d. Present value of one per period
a. sinking fund factor
Module 5
Which of the following is not an advantage of direct capitalization?
a. Easy to use with special rent patterns, such as rent concessions and below-market rent.
b. Easy to support
c. Easy to estimate first year income
d. Easy to explain
a. Easy to use with special rent patterns, such as rent concessions and below-market rent.
Module 5
Which of the following sets of terms does not belong?
a. Cash on cash rate and equity yield rate
b. Overall rate and Property yield rate
c. Mortgage interest rate and mortgage constant
d. Equity cap rate and equity dividend rate
c. Overall rate and property yield rate
Module 5 The mortgage interest rate represented by subscripting is a. R b. M c. Y d. V
c. Y
Module 5 A property's first year income was $25,000 and is forecast to be level over the 5 year holding period. The value is also not expected to change. If the property sells for $250,000 what would the yield rate be? a. 10% b. 15% c. Higher than 10% d. Lower than 10%
a. 10%
250,000 PV 25,000 PMT 5 n 25,000 FV i =? = .10
Module 5 Advantages of the yield capitalization approach are that is accommodates atypical income and expense patterns and a. premises are limited b. premises are broad c. premises are explicit d. premises are vague
c. Premises are explicit
Module 5 The income and value associated with property can be divided into all but which of the following ways? a. Physically b. Artificially c. Legally d. Financially
b. Artificially
5-6 -Bundle of rights in the income approach
The income stream can be divided in four ways making each component less than the bundle of rights.
Physically- Land and Building
Financially - Mortgage and Equity
Economically - Income stream and reversion
Legally - Real property, tangible property, intangible assets
Module 5 Which of the following interests is both a landlord and a tenant? a. sandwich position b. leased fee c. leasehold d. fee simple
a. sandwich position
Module 5 An ownership interest held by a landlord with the rights of use and occupancy conveyed to others is a a. sandwich lease b. leased fee estate c. fee simple estate d. leasehold estate
b. leased fee estate
Module 5 Net operating income plus operating expenses equals a. annual debt service b. effective gross income c. pretax cash flow d. potential gross income
b. effective gross income
To put it another way, effective gross income is the anticipated income from all operations of the real property after allowance is made for vacancy.
Module 5 Which of the following relationships represents the leasehold interest? a. unencumbered ownership interest b. interest held by the lessee c. Landlord ownership interest d. Absolute ownership
b. Interest held by the lessee
Leasehold estate is the interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.
Module 6 All capitalization methods require a. estimate of first year income b. income for the past 5 years c. estimate of last-year income d. no estimate of income
a. estimate of first year income
Module 6 Contract rent prior to a deduction for concessions is a. effective rent b. market rent c. scheduled rent d. face rent
d. face rent
Also known as nominal rent, face rent is defined as Contract rent prior to deduction of concessions.
Module 6 The type of rent used for vacant and owner occupied space is a. effective rent b. deficit rent c. contract rent d. market rent
d. market rent
Module 6 Which of the following is the one estimate that is common to both discounted cash flow analysis and direct capitalization? a. First years income b. reversion c. Yield rate d. Overall cap rate
a. First years income
Module 6 The rental income received in accordance with the terms of a percentage lease is a. percentage rent b. effective rent c. deficit rent d. contract rent
a. percentage rent
Module 6 Rent began at $20 per square foot three years ago and is scheduled to escalate according to the annual increase in the consumer price index. If the consumer price index was 188.2 three years ago, 190.3 two years ago, and 198.1 last year, what was the rent two years ago? a. $19.00 b. $21.05 c. $19.78 d. $20.22
d. $20.22
190.3/188.2 -1 = 0.112
$20 * (1+0.112) = $20.22
Module 6 Which of the following is the total income attributable to real property at full occupancy before vacancy and operating expenses are deducted a. Pre tax cash flow b. Potential gross income c. effective gross income d. Net operating income
b. Potential gross income
Potential gross income is defined as the total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.
Module 6 Annual rent under a shopping center lease is summarized at $100,000 plus 5% of gross sales over $2,000,000. The tenant is forecast to gross $2,500,000 this year. The market rent for this space is $75,000 plus 3% of gross sales over $1,500,000. How much rent will the tenant pay this year a. $100,000 b, $125,000 c. $150,000 d. $105,000
b. $125,000
500,000 * .05 = 25,000
25,000 + 100,000 = 125,000
Module 7 The lease provision that allows a tenant to cancel a lease is a. a buyout clause b. an escape clause c. a renewal option d. pass through
b. an escape clause
Module 7 The term that refers to the right, but not the obligation, of a tenant to continue a lease at a specified term and rent is a. a renewal option b. a flat rental lease c. an escape clause d. a buyout clause
a. a renewal option
Module 7 The provision in a lease that provides for a payment by a landlord or a tenant to induce a lease cancellation is a. a renewal option b. a buyout clause c. an escape clause d. a pass-through
b. a buyout clause.
Module 7 The clause in a lease that limits a tenant's share of operating expenses is a. an expense cap b. an expense stop c. an expense start d. an expense hold
a. an expense cap
Module 7 A lease that provides for specified changes in rent at one or more points during the lease term is a. a graduated rental lease b. a revaluation lease c. an index lease d. a percentage lease
a. a graduated rental lease
Module 7 A lease that grants the right to use and occupy land is a. a master lease b. a full service lease c. a flat lease d. a ground lease
d. a ground lease
Module 7 The typed of lease that is a specified level of rent that continues throughout the lease term is a. an index lease b. a revaluation lease c. a graduated rental lease d. a flat rental lease
d. a flat rental lease
Module 7 The lease characteristic that is the term or length of the lease that establishes the period over which schedule income can be expected to be received is a. change b. quality c. durability d. quantity
c. durability
Income Characteristics of Leases:
Quantity: The amount of income stipulated in the lease
Quality: The credit strength of the tenant and the relationship of the contract rent to market rent determine the probability of collecting the income stipulated in the lease.
Durability: The term (length) of the lease establishes the period over which scheduled income can be expected to be received.
Module 7 The lease characteristic that is the amount of income stipulated in a lease is a. quantity b. durability c. change d. quality
a. quantity
Income Characteristics of Leases:
Quantity: The amount of income stipulated in the lease
Quality: The credit strength of the tenant and the relationship of the contract rent to market rent determine the probability of collecting the income stipulated in the lease.
Durability: The term (length) of the lease establishes the period over which scheduled income can be expected to be received
Module 7
The two primary adjustment techniques used to estimate market rent are
a. relative comparison analysis and ranking analysis
b. matched pairs and qualitative
c. matched pairs and quantitative
d. quantitative and qualitative
a. relative comparison analysis and ranking analysis
Module 8 For direct capitalization, vacancy and collection loss generally applies to what year's potential gross income? a. The past year's b. The present year's c. 5 years ago d. Next year's
d. Next year’s
Module 8 The amount of vacant space that is needed in a market for its orderly operation is a. physical vacancy b. structural vacancy c. market vacancy d. frictional vacancy
d. frictional vacancy
Frictional vacancy is the amount of vacant space needed in a market for its orderly operation. Frictional vacancy allows for move-ins and move-outs
Module 8 Effective gross income is the anticipated income from all operations of the property at what time an allowance is made for vacancy and collection losses, and an addition is made for any other income. a. Before b. During c. After d. No allowance is made
c. After
Effective Gross Income:
The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses, and an addition is made for any other income.
Module 8 For leased fee interest, potential gross income is based on a. contract rents b. market rents c. land rents d. building rents
a. contract rents
Interest Being Appraised:
Potential gross income based on market rents is used for the fee simple interest
Potential gross income based on contract rents is used for the leased fee interest.
