Income Approach Flashcards
What is Einstein’s “Rule of 72”?
“Rule of 72” - How long does it take to double your money at a given interest rate?
Step 1: Determine the interest rate to be examined. Let’s use 6% for our example.
Step 2: Divide the number 72 by 6%.
72 [ENTER] 6 [÷] Display reads: 12
At 6% interest you will double your money invested in 12 years. Unfortunately, your investments or bank deposits that are earning a lower amount of interest – 2%, say – would take 36 years, and at 1% interest it would take 72 years to double your money.
Difference between Direct and Yield Capitalization
In Direct Capitalization, a single year’s Potential Gross Income is assumed to be indicative of its value.
In Yield Capitalization, it is assumed the value is reflected in the present value of a stream of future cash flows resulting from future Potential Gross Incomes.
Income Formula
PGI Potential Gross Income
-V&CL - Vacancy and Collection Losses
______ __________________________________
EGI Effective Gross Income
-TOE - Total Operating Expenses (fixed, variable, replacement reserves)
______ _____________________________________
NOI Net Operating Income
If the appraiser bases the income and calculations on existing leases, the ownership interest appraised can be classified as “______________.” If the appraiser bases the income and calculations on market rents, the appraised interest is “___________________.”
If the appraiser bases the income and calculations on existing leases, the ownership interest appraised can be classified as “leased fee.” If the appraiser bases the income and calculations on market rents, the appraised interest is “fee simple.”
six-step appraisal process:
six-step appraisal process first.
Definition of the Problem
Scope of Work
Data Collection and Analysis
Application of the Approaches to Value
Reconciliation of Value Indications and Final Opinion of Value
Report of Defined Value Opinions
Equity Residual Technique
Know Data:
- Mortgage
- Mortgage annual payments
- Annual net operating income
- Equity cap rate
What is property value?
NOI - Annual Debt Service (Mortgage Payment) = ** Residual Income to Equity**
Residual Income to Equity/Equity Cap Rate = Available Equity
Available Equity + Mortgage = ** Property Value**
Mortgage Residual Technique
Know Data
-Available equity
- Annual net operating income
- equity cap rate
- mortgage cap rate
What is property value?
Available Equity * Equity cap rate = Residual Income to Equity
NOI - Residual Income to Equity = Mortgage Payment
Mortgage Payment / Mortgage cap rate = Mortgage value
Available Equity + Mortgage = Property Value
Mortgage capitalization rate (RM):
The mortgage capitalization rate that is the ratio of the first-year debt payment divided by the beginning loan balance. In some instances, the ratio may be calculated using one month’s payment, but typically it is the total of the loan payment for an entire year. Also referred to as a mortgage loan constant.
For example, a $100,000 loan has terms of 10 percent interest, monthly payments, and a 20-year term. Monthly payments equal $965.02. How do you calculate the mortgage capitalization rate?
RM = ($965.02 x 12) / $100,000 = 0.116, or 11.6%”
Monthly payments * 12 = Annual Payment
Annual Payment/Original Loan Amount = Mortgage Capitalization Rate
RM = ($965.02 x 12) / $100,000 = 0.116, or 11.6%”
Band of Investment
Mortgage-equity formula:
The weighted average of the mortgage capitalization rate (mortgage constant) and equity capitalization rate (equity dividend rate) results in an estimate of the overall capitalization rate for the property (RO = M x RM + (1 – M) x RE).
For example: A property being appraised can be financed with a 75% loan. The loan has a 15-year term with monthly payments at 9 percent interest (indicated mortgage capitalization rate of 0.1217). Comparable sales indicate an equity capitalization rate of 10 percent. The overall capitalization rate can be estimated as follows:
RO = (0.75 x 0.1217) + (0.25 x 0.10) = 0.116
Band of Investment
Land-building formula:
Land-building formula: The weighted average of the land capitalization rate and the building capitalization rate results in an estimate of the overall capitalization rate for the property (RO = L x RL + B x RB).
For example, comparable sales indicate that the land capitalization rate is 0.09, the building capitalization rate is 0.14, and the land-to-value ratio is 30 percent. The indicated overall capitalization rate can be calculated as follows:
RO = (0.30 x 0.09) + (0.70 x 0.14) = 0.125)”
Debt coverage ratio (DCR):
The ratio of annual net operating income (NOI) divided by the annual debt service. Lenders usually specify a minimum DCR (e.g., 1.2) that they require the property to meet during the first year of a loan term.
For example, if a property is estimated to have an NOI of $12,000 for a given year and debt service (principle and interest) during that year is $10,000, then the DCR is $12,000/$10,000, or 1.2. ”
Debt coverage ratio formula: A method of developing the overall capitalization rate
Debt coverage ratio formula: A method of developing the overall capitalization rate by multiplying the debt coverage ratio by the mortgage capitalization rate and the loan-to-value ratio for the property (RO = DCR x RM x M). See also band of investment technique.
For example, a property can be purchased with a 75% loan. The loan has a 15-year term with monthly payments at 9 percent interest (indicated mortgage capitalization rate of 0.1217). The lender requires a debt coverage ratio of 1.2. The overall capitalization rate can be estimated as follows:
RO = 1.2 x 0.1217 x 0.75 = 0.1095 [implied cap rate for property]
This method views the valuation problem from the point of view of the lender only. There is an implied equity dividend in the analysis. If the implied equity dividend reflects the requirement of a typical investor, this method may be used to estimate the overall rate for a market value appraisal.”
The Debt Coverage Ratio formula has the nickname of ”underwriter method” for obvious reasons. Because it is applicable when the implied equity dividend reflects the requirement of a typical investor, there are often occasions when this method would not be appropriate. It is important to note that the implied cap rate may or may not be the actual cap rate derived from other methods. It is only a check by the lender/underwriter on the “reasonableness” of the cap rate selected in an appraisal.
Finding Overall Rate (RO) via Effective Gross Income Multipliers
This is a hybrid method that involves the net income ratio and the Effective Gross Income Multiplier.
Effective Gross Income is Potential Gross Income less the Vacancy and Collection Losses:
PGI – V&CL = EGI
The Net Income Ratio (NIR) is the Net Operating Income (NOI) divided by the effective gross income (EGI):
NOI / EGI = NIR
The Effective Gross Income Multiplier (EGIM) is then the Sales Price (aka: value) divided by the Effective Gross Income:
V / EGI = EGIM
To develop an Overall Rate (RO) divide the Net Income Ratio (NIR) by the Effective Gross Income Ratio (EGIM):
NIR ÷ EGIM = RO
The Net Income Ratio is …
The Net Income Ratio (NIR) is the Net Operating Income (NOI) divided by the effective gross income (EGI):
NOI / EGI = NIR
The Effective Gross Income Multiplier is …
The Effective Gross Income Multiplier (EGIM) is then the Sales Price (aka: value) divided by the Effective Gross Income:
V / EGI = EGIM
Overall Rate (RO) utilizing Net Income Ratio by the Effective Gross Income:
NIR ÷ EGIM = RO
or
(NOI/EGI) / (Value/EGI) = NOI/Value = Ro
DCF techniques can be applied in the valuation or analysis of:
DCF techniques can be applied in the valuation or analysis of:
-proposed construction
-land development
-condominium development or conversion
-rehabilitation development
-income-producing real estate of various types.
DCF analysis has become a requirement of many real property clients and intended users. These users of appraisal services favor the inclusion of DCF analysis as a management tool in projecting cash flow and return expectations, capital requirements, refinancing opportunities, and timing of future property dispositions.
Yield Capitalization vs. Discounted Cash Flow
Yield Capitalization. Discounted Cash Flow analysis is under the umbrella of Yield Capitalization, but there is so much more involved that we will not only continue to discuss Discounted Cash Flow analysis, but also include other related procedures and methodologies
C
C Mortgage Coefficient
CF
CF Cash Flow
i
I
i Interest Rate
I Income
IB
IB Building Income
IE
IE Equity Income
IL
IL Land Income
ILF
ILF Leased Fee Income
ILH
ILH Leasehold Income
IM
IM Mortgage Income
IO
IO Net Operating Income
IRR
IRR Internal Rate of Return
J
J “J” Factor
K
K “K” Factor
M
M Loan-to-value ratio
MIRR
MIRR Modified Internal Rate of Return
n
n Number of periods
NPV
NPV Net Present Value
When estimating interest rates in net present value calculations, the rates used are typically:
Current rates
If the investment required for two different properties is different, the Net Present Values will differ even if all other factors are alike.
P
P Percentage of Loan Paid Off
R
R Capitalization Rate
RB
RB Building Capitalization Rate
RE
RE Equity Capitalization Rate
RL
RL Land Capitalization Rate
RM
RM Mortgage Capitalization Rate (constant)
RO
RO Overall Capitalization Rate
V
V Value
VB
VB Building Value
VE
VE Equity Value
VL
VL Land Value
VLF
VLF Leased Fee Value
VLH
VLH Leasehold Value
VM
VM Mortgage Value
VO
VO Overall Value
Y
Y Yield Rate
YE
Y E Equity Yield Rate
YET
YET Equity Yield Rate After Tax
YLF
YLF Yield to Leased Fee
YLH
YLH Yield to Leasehold
YM
YM Mortgage Yield Rate
YO
YO Overall Yield Rate (AKA: Property Yield Rate)
YOT
YOT Overall Property Yield Rate After Tax
Δ
Δ - Percent of change
ΔE
ΔE Percent of change in equity
ΔI
Δ percent of change in income
ΔO
ΔO percent of change in overall property value
1/Sn
1/Sn Present value factor
an
an▯ Present value of an amount per period
1/Sn▯
1/Sn▯ Sinking Fund Factor
Sn
Sn Future value of an amount
Sn▯
Sn▯ Future value of an amount per period
1/an▯
1/an▯ Partial payment factor
The premise used for valuing the income stream of a wasting asset is:
Hoskold
The K-factor is an income adjustment used to convert a stream of income changing at a constant ratio into its
Level equivalent
An algebraic formula used to calculate an overall rate that is based on mortgage equity analysis concept and allows for cash flow forecasts, including the impact of financing, is the:
Ellwood formula
In the Akerson format the non-algebrais formula is similar to:
The Band of Investment Method for determing a cap rate.
An alternative way of writing the Ellwood formula is:
Akerson format
The Ellwood “formula is applicable only to properties with stable or stabilized income streams and to properties with income streams expected to change according to the:
J-factor pattern or K-factor pattern
The premise used for valuing the income stream of a wasting asset is:
Hoskold
An income adjustment or stabilization factor formerly used to convert a stream of income changing at a constant ratio into its stable or level equivalent is the:
K factor
The Hoskold premise was designed to value the income stream of a/an
Wasting asset
The K-factor is an income adjustment used to convert a stream of income changing at a constant ratio into its
Level equivalent
An assumption that the present value of an income stream is based on a single discount rate is the definition of which of the following?
Inwood premise
A method of estimating property value by discounting all expected future cash flows refers to:
Yield Capitalization
An income adjustment or stabilization factor formerly used to convert a stream of income changing on a curvilinear basis into its level equivalent is the:
J factor
The Hoskold premise assumes that a portion of the net operating income is:
Reinvested at a safe rate
A wasting asset
A wasting asset is an item that has a limited life span and irreversibly declines in value over time. Examples include depreciating fixed assets such as vehicles and machinery and securities with time decay, like options, which continually lose time value after purchase.
A method of estimating property value by discounting all expected future cash flows refers to:
Yield Capitalization
Basic steps of Yield Capitalization:
Yield Capitalization, the basic steps are to:
1) Estimate a holding period
2) Determine estimated cash flows
3) Estimate a reversion
4) Select a yield rate
5) Calculate the present value of the cash flows and reversion
Direct Capitalization vs Yield Capitalization
In Direct Capitalization, the concern was using a single year’s cash flow to reflect a stabilized income or estimate of stabilized income.
In Yield Capitalization, the cash flow forecast addresses a series of years’ cash flows, over the holding period. These cash flows most often are based on rental income from income producing properties. Even when a specific site improvement is owner-occupied and not currently experiencing rental income, the appraiser can extract from projected market rents that would reflect typical investor attitudes.
The difference between the present value of all positive cash flows and the present value of negative cash flows is referred to as:
Net Present Value
When the initial out-go is divided into the present value of the in-flows, the result is called the:
Profitability index
A Profitability Index of -1 means that the investment:
Fails to meet the profitability goals
The number of animals that can feed in an area without damaging other vegetation is known as:
Grazing capacity
Transferable development rights are often used to:
Preserve historic sites or buildings
Preserve agricultural land
The contributory value of merchantable timber as it stands on timberlands is:
Stumpage value
Which is a consideration in valuing timberland?
Quality
Species
Obstacles
Rights purchased or acquired through condemnation that allow aircraft to fly at low elevations are called:
Avigation easements
As a general rule, in the appraiser’s day-to-day practice, the real property rights being appraised are:
Surface rights
An area of public or private rangeland that is grazed as a single entity defines:
Grazing unit
In valuing mineral rights, which approach is sometimes considered unreliable?
Income Approach
The agency that sets standards for various trees is called the:
U. S. Forestry Service
Consideration of annual production, costs of extraction, and environmental issues apply to the valuation of:
Mineral rights
Comparable sales of airspace would more likely be found
In dense urban areas
Factors such as consumptive use and amounts that can be diverted relate to the appraisal of:
Water rights
The coal mining process that causes surface subsidence is:
Long wall
One method for determining the value of air rights is:
Before-and-after
A before-and-after method involves two values (before rights and after rights) with the difference between the values being the value of the rights. This method can be a very reliable indicator of value for what type of rights?
Intangible
Water
Life estate
Investment
Water
A logical flow to a narrative appraisal report is:
Introduction, Problem Identification, Presentation of Data, Analyses and Conclusions
When an appraiser performs a feasibility study and comparable sales are scarce, what is a common alternative?
Subdivision Analysis
External obsolescence can be measured by
- Capitalizing income loss due to the negative influence
- Comparison sales of similar properties which are and are not subject to the same negative influence
The commonality of the J Factor and the K Factor is that they both
Solve problems with increasing/decreasing income flows
If an appraiser analyzes the demand in a local area relative to a national benchmark, that is:
BPI - buying power index
The buying power index (BPI) relates to
Demand and ability
The K-factor is used to convert a stream of income that changes….
at a constant ratio into a level payment equivalent.
Prior to 1987, short term capital gains were treated as ordinary income but long term capital gains were not taxed. After 1987,
Both are taxed as ordinary income
When the appraiser identifies taxable profit, it is called:
Capital Gain
One of the methods of measuring external obsolescence is by:
Capitalizing the income loss due to the negative influence
The statement, “capitalization rate and yield rate are interchangeable” is:
False. A cap rate uses one year’s data and a yield rate uses income streams for many years.
The difference between economic and locational obsolescence is:
Economic impacts areas and locational impacts a site
Ordinary Annuity vs. Annuity Due
Ordinary Annuity vs. Annuity Due
An ordinary annuity is when a payment is made at the end of a period. An annuity due is when a payment is due at the beginning of a period.
An appraiser who takes an assignment beyond his level of competency, and does not take the necessary steps to become competent, will likely produce a:
- Non-credible value opinion
- A misleading report
- A poorly-documented value opinion
- All of these
All of these
Although the Income Approach can have different elements, depending on the property type, there are some basic expectations which are universal to the Income Approach. Which of the following would NOT be one of those universal expectations?
- Credible data
- Accurate calculations
- Absolute accuracy in estimating replacement reserves
- Properly developed and supported rates
Absolute accuracy in estimating replacement reserves
Commonly challenging assignment types include all of the following EXCEPT:
- Car washes
- Restaurants
- Hotels
- Office buildings
Office buildings
Federal financial institution regulatory agencies identified several violations related to the development of the Income Approach. Which of the following was NOT identified as an issue with the Income Approach?
- Failing to address market trends
- Failing to estimate the effective age
- Using non-market based time constraints
- Failing to report appropriate deductions and discounts for tract development appraisal
Failing to estimate the effective age
The subject of an appraisal review assignment can be:
- All or part of an appraisal report
- The workfile
- Either or both of these
Either or both of these
A reviewer believes the original appraiser’s capitalization rate of 9.5% is inappropriate, and changes it to 10.5%, which results in the reviewer’s own opinion of value. What does USPAP state about the reviewer’s obligations when reporting this opinion of value?
- She may report her own value opinion within her review report
- She must prepare a separate appraisal report which complies with Standard 2
- If she provides an oral report, she does not have to comply with USPAP
- This situation does not result in the reviewer developing her own opinion of value
She may report her own value opinion within her review report
Which of these statements in a review report would indicate that the reviewer did NOT develop her own opinion of value?
- I concur with the value conclusion
- I do not agree with the value
- The value conclusion is adequately supported
- In my opinion, the value is too high
The value conclusion is adequately supported
According to Standard 3, if an appraiser who is reviewing a real property appraisal report is asked to provide his or her own opinion of value, that opinion must be developed in accordance with:
Standard 1
“Convincing or believable by virtue of forcible, clear, or incisive presentation” defines:
Cogent
Net present value (NPV) is a financial metric that seeks to capture the total value of an investment opportunity. The idea behind NPV is to project all of the future cash inflows and outflows associated with an investment, discount all those future cash flows to the present day, and then add them together.
NPV is a financial metric that seeks to capture the total value of an investment opportunity. The idea behind NPV is to project all of the future cash inflows and outflows associated with an investment, discount all those future cash flows to the present day, and then add them together.
Consideration for quality, quantity, transportation costs, and restoration cost apply to the valuation of:
Mineral rights
Agents of production include Land, Labor, Capital, and:
Zoning
Highest and Best Use
Anticipation
Coordination
Coordination
When the partial interest is less than 50%, the:
Party still has full voting rights
Value of the interest remains equal
Value of the interest declines
Management decisions remain equal
Value of the interest declines
When an appraiser identifies the cash flow after debt service but before income and capital gains taxes, it is called the:
Equity dividend
Internal Rate of Return
Capital recovery rate
Debt coverage ratio
Equity dividend
A percentage rent paid in addition to the base rent is called _______.
Effective rent
Excess rent
Overage rent
Supplemental rent
Overage rent
Taxable profit from the sale of a parcel of real property would be called _________.
Net Operating Income
Net Residual Income
Capital Gain
Effective Gross Income
Capital Gain
“Money paid for, or earned by, the use of capital; a return on capital as distinguished from a return of capital” is the definition of:
capitalization
interest
principal
leverage
interest
Vacancy and Collection Loss is a percentage calculation based on the:
Potential Gross Income from rents only
Potential Gross Income, including other income
Effective Gross Income from rents only
Effective Gross income, including other income
Potential Gross Income, including other income
The board of The Appraisal Foundation which establishes experience criteria for licensing and certification of appraisers is the:
ASB
AQB
ASC
APB
AQB
Because the estimates of revenues and rates in the future are subject to error, the use of this fair warning disclosure to the client is warranted:
Jurisdictional Exception
Hypothetical Condition
Supplemental Standards
Extraordinary Assumption
Extraordinary Assumption
An appraiser may find an older structure’s higher energy and maintenance costs less of a negative factor when:
The buildings are masonry construction
The buildings are frame construction
Retrofitting is an option
There is historical or retro appeal
There is historical or retro appeal
The number of animals that can feed in an area without damaging other vegetation is referred to as the:
Cattle/acre ratio
Acreage consumption factor
Grazing capacity
Grazing unit
Grazing capacity
The difference between a property selling for $30,000 thirty years ago, and selling for $100,000 today, is predominantly a matter of:
Loss in the purchasing power of the dollar
The principle of increasing returns
Demand in the marketplace
Appreciation
Loss in the purchasing power of the dollar
A lease that involves future rents being determined by market rents at predetermined intervals would be what type of lease?
Leased fee extension
Leasehold extension
Recertification lease
Revaluation lease
Revaluation lease
Estimated future cash inflows that may change, but have been adjusted to an equal amount per year are ____________.
Capitalization rate factors
Discounted Cash Flows
Equities
Stabilized incomes
Stabilized incomes
The relevant characteristics of an assignment consist of:
A standard list of requirements
Varied information from assignment to assignment
A specific list of 11 minimum items
Items retained in the workfile only
Varied information from assignment to assignment
The city of San Francisco was developed where it is, predominantly due to:
Mountain views
Rivers
The bay
Coal reserves
The bay
Identification of the type of soil on a given parcel is most important to what property type?
Agricultural
Industrial
Freestanding single unit
Office building
Agricultural
The mathematical process used with all of the table’s six functions is:
Addition
Subtraction
Multiplication
Division
Multiplication
Special use properties are typically valued using which approach to value?
cost approach
general income
sales comparison
income capitalization
cost approach
The best source for collecting data in order to predict future cash flows is:
Past sales
Current Websites
Interviews with market participants
The appraiser’s office files
Interviews with market participants
The term “Long Wall” refers to which of the following:
A building measuring methodology
A controversial coal mining methodology
A construction sequence in framing
The origin of the “chain” method for are of an acre.
A controversial coal mining methodology
The appraiser’s research and reporting needs to be as detailed as:
The appraiser thinks appropriate
That dictated by IREM
The appraiser’s peers would have done
The property owner dictates
The appraiser’s peers would have done
Management would be allocated under what expense category?
Fixed
General
Reserves
Variable
Variable
An appraiser discovers that a tenant providing free dry cleaning to the landlord for the duration of the lease would be addressed in a lease agreement under:
Kick-backs
Concessions
Allowances
Landlord perks
Concessions
A discount rate is synonymous with the:
Yield rate
Common rate
Capitalization rate
Safe rate
Yield rate
With DCF software, the appraiser should describe the software’s methods and ____________.
Assumptions
Reasoning
Error ratio history
Procedures
Assumptions
A rate of return on capital usually expressed as a compound annual percentage rate is the _____________.
Discount rate
Yield rate
Capitalization rate
Annuity rate
Yield rate
In the building residual technique, the appraiser deducts from the NOI the:
Land value x RL
Land value x RB
Building value x RL
Building value x RB
Land value x RL
If market rent is greater than contract rent, the leasehold value is _________.
Equal to leased fee
A negative
A positive
Of no value
A positive
Historically, most real estate properties have:
Fallen behind inflation
Kept up with inflation
Out-paced inflation
Not been compared to inflation rates
Out-paced inflation
When dividing two negative numbers:
The result is positive
The result is negative
The signs cancel out
Both A and C are correct
Both A and C are correct
The cost of foregone opportunities is:
Entrepreneurial loss
Entrepreneurial risk
Opportunity cost
Opportunities foregone
Opportunity cost
Lease terms for multifamily buildings in comparison to lease terms for office buildings are typically found to be:
Shorter
Somewhat similar
Exactly the same
Longer
Shorter
A minimum criterion to be considered, per the IRS in valuing historic preservation easements, is that the property must be:
Over 100 years old
Located in an historic district
Constructed of period materials
Not significantly altered from the original structure
Located in an historic district
A reviewer’s own opinion of value must meet, at a minimum, the reporting requirements of:
Standards Rule 2-2(b)
Buildings with higher rents, above average tenants, and superior construction are:
Class A
Class B
Class C
Class D
Class A
If an appraiser analyzes the demand in a local area relative to a national benchmark, that is known as ________.
BTU
BTI
BPI
BPO
BPI
The last item in the minimum reporting requirements is:
The scope of work summary
Support and rationale for the highest and best use
A certification
Signatures
A certification
To an appraiser, the relationship between the amount of unrented space and total space in a building is known as the:
Absorption rate
Equity rate
Vacancy rate
Yield rate
Vacancy rate
To have value, airspace must have __________.
A severability clause in the deed
Demand
Height above 100 ft.
Federal approval
Demand
It gives credibility to the assignment results when comparable properties that are analyzed for income are as similar to the subject as possible. Factors to be considered in determining comparability would include:
Location, design, income
Location, income, expenses
Location, building class, amenities
Location, location, location
Location, building class, amenities
The contributory value of merchantable timber as it stands on timberlands is called the:
Recovery value
Board feet value
Lumber value
Stumpage value
Stumpage value
Tenant improvements are:
A valuable asset to the landlord
A negative influence on re-leasing
A positive or a negative influence on value and rents
By definition, easily removed items
A positive or a negative influence on value and rents
In multi-family appraisal, the landlord typically pays the _____________.
Electricity
Gas
Heating
Water
Water
Another term appraisers use for a step-up lease is:
Percentage lease
Multi-story building lease
Changing index lease
Graduated payment lease
Graduated payment lease
For use with federally insured financial institutions, the definition of “market value”:
References the fastest possible sale
Contains no reference to time frame
Specifically refers to three to six months
Refers to a reasonable exposure time
Refers to a reasonable exposure time
A good source for the cost of pest control services would be:
The Owner/Manager
The American Pest Control Association (APCA)
Interviewing Tenants
The Journal of Pest Control Services
The Owner/Manager
A party entitled to receive a property held in a life interest after the prior estate expires is the:
Heir
Bequeathed
Remainderman
Joint partner
Remainderman
Per the IRS, a minimum criterion to be considered in valuing historic preservation easements is that the property must be:
Over 100 years old
Located in a historic district
Constructed of period materials
Not significantly altered from its original structure
Located in a historic district
Annual installments of regular contracted amounts are __________.
PGIs
EGIs
Annuities
Operating Incomes
Annuities
Free-standing single-unit properties are generally:
Sold by auction
Owner/user
Affiliated with a franchise
On 12-month leases
Owner/user
A discount rate can also be called a _________.
Yield rate
Common rate
Capitalization rate
Safe rate
Yield rate
STANDARD 4 states that reviewers must check for all of the following EXCEPT:
Conformity
Completeness
Adequacy
Relevance
Conformity
“A yield rate used to convert future payments or receipts into present value” defines:
Discount rate
Reversion rate
Capitalization rate
Sinking fund
Discount rate
The use of a site that offers the greatest financial returns is the:
Current use
Maximum use
Designed use
Highest and best use
Highest and best use
Maximizing the amount of front footage of a site is important to retail establishments for:
Ingress
Egress
Visibility
Median cuts
Visibility
Where in a lease are “grace period” clauses found?
Under rental payment provisions
As part of the escape clauses
In the Lessee’s rights clause
In the lease addendum
Under rental payment provisions
Occupancy rates are terms used most commonly in what type of property?
Agricultural
Free-standing single unit
Industrial
Hotel/motel
Hotel/motel
The return on an investment, which considers income received over time that equates the present value of future cash flows with the initial investment, is termed the:
Net Operating Income
Yield Rate
Internal Rate of Return
Overall Capitalization Rate
Yield Rate
USPAP says that an appraiser is expected to be at least as knowledgeable about the market for the type of property appraised as the typical _________.
Market participants
Brokers
Sellers
Buyers
Market participants
Land is valued as though:
Level
Developed
Fee simple
Vacant
Vacant
The number of animals that can feed in an area without damaging other vegetation is referred to as the:
Cattle/acre ratio
Acreage consumption factor
Grazing capacity
Grazing unit
Grazing capacity
When reconstructing an operating statement, receipt of partial subletting and easement fees would be included in:
General expenses
Use restrictions
Lease clauses
Other income
Other income
To calculate using the Rule of 72, first, key in [72] [ENTER] then________ [ ÷ ].
72
The principal amount
The number of years
The interest rate
The interest rate
The Scope of Work, as far as the acceptability of the degree of research, is determined by an appraiser’s peers’ actions and:
The intended user’s expectations
Secondary market requirements
The reporting format
The age of the property
The intended user’s expectations
“An appraiser must determine, prior to accepting an assignment…” are words found in USPAP’s:
Preamble
Competency Rule
Ethics Rule
Jurisdictional Exception Rule
Competency Rule
According to a quoted USPAP reference, “The value of the whole…”
Equals the sum of the parts
Is less than the sum of the parts
Exceeds the sum of the parts
May equal, exceed or be less than the sum of the parts
May equal, exceed or be less than the sum of the parts
Annual installments of regular contracted amounts are __________.
PGIs
EGIs
Annuities
Operating Incomes
Annuities
Estimated future cash inflows that may change, but have been adjusted to an equal amount per year are ____________.
Capitalization rate factors
Discounted Cash Flows
Equities
Stabilized incomes
Stabilized incomes
An effective tool for bringing older numbers and data to current timeframes is the use of __________.
Ratios
Dollars
The Rule of 72
Discounting
Ratios
An appraisal assignment would NOT include a Highest and Best Use analysis if it was for:
Investment value
Market value
Value-in-use
All of the above require Highest and Best Use analysis
Value-in-use
Disclosure of the work not performed:
Is part of the certification
Is not required
Is required when necessary so as to not mislead
Relates only to the inspection of the property
Is required when necessary so as to not mislead
Variable expenses would include:
Heating and cooling equipment replacement
Sewage lift station replacement
Emergency generator installation
Private well equipment repair
Private well equipment repair
When landowners purchase a right that cannot be used by the current owner for future development, it is a:
Excess land transfer
Transferable Development Right
Development Easement
Use Easement
Transferable Development Right
When a reviewer provides his or her own opinion of value in a review assignment, all of the following items must be reported EXCEPT:
Identity of intended users
All of the above must be included
Identity of the interest appraised
Identity of the appraisers completing the work under review
All of the above must be included
To have value, airspace must have __________.
A severability clause in the deed
Demand
Height above 100 ft.
Federal approval
Demand
Real Estate Taxes would be listed under what expense category?
Fixed
General
Reserves
Variable
Fixed
A tenant may be concerned about the financial stability of the landlord. Lease provisions addressing this issue would be found under:
Project Accounting
Lessee’s Security
Landlord Guarantees
Landlord Solvency
Landlord Solvency
The use of a site that offers the greatest financial returns is the:
Current use
Maximum use
Designed use
Highest and best use
Highest and best use
The rate of return beyond what is available in risk-free investment is called the:
Risk premium
Risk index
Equity premium
Equity index
Risk premium
When the initial out-go is divided into the present value of the in-flows, that results in the:
Alpha index
Beta index
Cash flow index
Profitability index
Profitability index
A 25% interest in a partnership that lacks operational control typically has:
25% of the total value
Less than 25% of the total value
Greater than 25% of the total value
Equal voting power
Less than 25% of the total value
The specific needs of an individual investor are considered in a(n) ________ assignment.
Market value
Recovery value
Investment value
Highest and best use
Investment value
The best source for collecting data in order to predict future cash flows is:
Past sales
Current Websites
Interviews with market participants
The appraiser’s office files
Interviews with market participants
STANDARD 4 states that reviewers must check for all of the following EXCEPT:
Conformity
Completeness
Adequacy
Relevance
Conformity
An interest shared by co-owners who cannot individually convey any part of the property hold a (an):
Undivided partial interest
Tenant in common interest
Leased fee interest
Mortgagee interest
Undivided partial interest
Concessions can also contribute to:
A. Expenses
B. Collection Losses
C. Increases in PGI
D. Both A and B
D. Both A and B
A reward or compensation for contribution describes ____________.
Commission
Equity position
Entrepreneurial profit
Investor’s premium
Entrepreneurial profit
A capitalization rate used to forecast a reversionary value in DCF is a:
Base rate
Terminal capitalization rate
Future value rate
Going-in rate
Terminal capitalization rate
A letter of transmittal always includes the following EXCEPT:
Description of the property
Dates
Type of value
Value conclusion
Value conclusion
The income classification after deduction of Vacancy and Collection Allowances is referred to as the __________.
Potential Gross Income
Effective Gross Income
Net Operating Income
Pre-Tax Cash Flow
Effective Gross Income
An appraiser’s most critical concern in developing projected incomes is:
Leverage
Accuracy
Amenities
Vacancy rate
Accuracy
If the lender shares in any losses:
Loan terms are shorter
Investor always comes out ahead
Holding periods are generally longer
Loan terms are longer
Holding periods are generally longer
New construction hotel/motel appraisal assignments are initially concerned with what key factor?
Local room rates
Absorption rate
Land to building ratio
Room type ratio
Absorption rate
An appraiser should understand that renewal options allow the tenant to:
Renew the lease as is
Renew the lease with new rents and duration
Renew the lease for an indefinite term
Change the nature of the tenant’s business
Renew the lease with new rents and duration
The rate of return that reflects the effect of financing on the investor’s rate of return is called the:
Internal Rate of Return
Equity Yield Rate
Overall Yield Rate
Overall Rate
Equity Yield Rate
If market rent is greater than contract rent, the leasehold value is _________.
Equal to leased fee
A negative
A positive
Of no value
A positive
The approach to value most often used for time-share interests is:
Discounted Cash Flow
Income Capitalization
cost approach
sales comparison approach
sales comparison approach
In the appraisal of new shopping centers, a major consideration would be:
Location of employment
Absorption rates
Regional occupancy statistics
National occupancy statistics
Absorption rates
USPAP is fundamentally about:
Development
Communication
Ethics and Competency
Definitions and Advisory Opinions
Ethics and Competency
The agencies that regulate Federal Financial Institutions use a market value definition that begins with the:
Lowest defendable price
Most probable price
Highest possible price
Most reasonable price
Most probable price
A lease that involves future rents being determined by market rents at predetermined intervals would be what type of lease?
Leased fee extension
Leasehold extension
Recertification lease
Revaluation lease
Revaluation lease
A general term representing a compound interest rate used to convert expected future cash flow into a present value estimate is:
Discount rate
Sinking fund
Annuity capitalization
Overall internal rate
Discount rate
Typically, the first step in valuing a partial interest is to:
Determine a capitalization rate
Estimate future value of the cash flows
Determine the discount
Value the entire property
Value the entire property
USPAP says that an appraiser is expected to be at least as knowledgeable about the market for the type of property appraised as the typical _________.
Market participants
Brokers
Sellers
Buyers
Market participants
When using commercial DCF software, the appraiser should:
Understand the algorithmic methods used
Provide a link to the software in the report
Cite the name and version in the report
Use at least two different versions from different vendors
Cite the name and version in the report
A property is owned by joint tenants. One of the parties dies. The demised party’s interest:
Reverts to the grantor
Goes to the other joint tenant
Becomes part of the demised party’s estate
Becomes government property by escheat
Goes to the other joint tenant
Rights purchased or acquired through condemnation that allow aircraft to fly at low elevations are called _____________.
Aviation variances
Aero easements
Aviation easements
Glide angle easements
Aviation easements
The delta symbol means:
Go back one
Go forward one
Direct capitalization is used
Change in a variable
Change in a variable
An appraisal assignment would NOT include a Highest and Best Use analysis if it was for:
Investment value
Market value
Value-in-use
All of the above require Highest and Best Use analysis
Value-in-use
With DCF software, the appraiser should describe the software’s methods and ____________.
Assumptions
Reasoning
Error ratio history
Procedures
Assumptions
Critics of using “Net Present Value” cite that:
The NPV concept is outdated
There can be more than one IRR
The NPV may not meet all investors’ needs
The IRR is the method of choice
The NPV may not meet all investors’ needs
Beginning in the 1980s, hotel/motel developers began what significant trend?
Furnishing all rooms with two double beds
Adding additional vending machines
Affiliating with a franchise
Getting out of the restaurant business
Getting out of the restaurant business
When a reviewer provides his or her own opinion of value in a review assignment, all of the following items must be reported EXCEPT:
Identity of intended users
All of the above must be included
Identity of the interest appraised
Identity of the appraisers completing the work under review
All of the above must be included
Conservation easements are for how many years?
For 10 years
For 25 years
For 99 years
Permanent, unless otherwise stipulated in the easement documentation
Permanent, unless otherwise stipulated in the easement documentation
The return on an investment, which considers income received over time that equates the present value of future cash flows with the initial investment, is termed the:
Net Operating Income
Yield Rate
Internal Rate of Return
Overall Capitalization Rate
Yield Rate
An income adjustment or stabilization factor used by an appraiser to convert a stream of income on a curvilinear basis into its level equivalent is the:
J factor
K factor
Y factor
S factor
J factor
When two unmarried parties purchase a property, they are typically:
Tenants in common
Joint tenants
Engaged in a limited partnership
Tenants at sufferance
Tenants in common
If there were nine sales of comparable properties in the last six months, the absorption rate would be:
6
1.5
3.3
1
1.5
MIRR is the same as:
IRR
MGIM
FAMB
AIRR
AIRR
Modified Internal Rate of Return is basically the same the Adjusted Internal Rate of Return.
In disputes of legal matters, the expenses related to attorney/legal fees are typically born by ____________.
The Lessor
The Lessee
Both parties in equal shares
The losing party
The losing party
Taxable profit from the sale of a parcel of real property would be called _________.
Net Operating Income
Net Residual Income
Capital Gain
Effective Gross Income
Capital Gain
“A yield rate used to convert future payments or receipts into present value” defines:
Discount rate
Reversion rate
Capitalization rate
Sinking fund
Discount rate
A railroad track can be a positive impact on value in the appraisal of:
Bed and breakfast hotels
Shopping centers
Industrial buildings
Agricultural properties
Industrial buildings
A change in total property value is signified by:
Beta
Sigma
Gamma
Delta
Delta
Occupancy rates are terms used most commonly in what type of property?
Agricultural
Free-standing single unit
Industrial
Hotel/motel
Hotel/motel
In reconstructing an operating statement, what type of expense is one that accountants use, but appraisers do not?
Depreciation
Pest control
Security
Utilities
Depreciation
The mortgage coefficient is signified by:
V
CM
MC
C
C
If market rent is greater than contract rent, the leasehold value is _________.
Equal to leased fee
A negative
A positive
Of no value
A positive
The reporting of the Scope of Work should be included in which part of the appraisal report?
The transmittal letter
The summary of important facts
The addenda
Any place
Any place
Dividing the difference between the amount borrowed and the amount paid back by the original loan amount is ___________.
Leased fee value
Time value
Overall rate
Discount rate
Discount rate
The commonality of the J Factor and the K Factor is that they both:
Change the mortgage rate
Change the loan-to-value ratio
Stabilize the sinking fund factor
Stabilize income
Stabilize income
The section of an appraisal report that describes what an appraiser did do, as well as what the appraiser did not do, is the:
Scope of Work Description
Summary of Important Facts
Letter of Transmittal
Data Presentation
Scope of Work Description
When management fees are a percentage, they are generally:
1 to 3%
3 to 7%
5 to 9%
7 to 12%
3 to 7%
The concept that the value of a particular component is measured as the amount that its absence would detract from the value of the whole is _________.
Contribution
Substitution
Conformity
Law of Increasing Returns
Contribution
New construction hotel/motel appraisal assignments are initially concerned with what key factor?
Local room rates
Absorption rate
Land to building ratio
Room type ratio
Absorption rate
All of the following are major parts of a narrative report EXCEPT the:
Problem identification
Data presentation
Appraiser’s credentials
Addenda
Appraiser’s credentials
In which type of assignment must a certification be included?
Commercial real property appraisals
Appraisal reviews
All of the above
Residential real property appraisals
All of the above
The difference between the abbreviations BTCF and ATCF is that:
One is about cash flow and the other is about capital funding
One involves real property taxes; the other, income taxes
One is before and one is after
No difference; they are interchangeable
One is before and one is after
Why a city, or part of a city, is in a specific location is a function of:
Siting factors
Architectural design
Site selection
First in sets the pattern
Siting factors
The estate that has the right to use an easement is referred to as the:
Owner’s estate
Dominant estate
Servient estate
Easement estate
Dominant estate
A national organization involved with office buildings is:
BOFA
BMOA
BOMA
BAOM
BOMA
Creating a number that is between two known numbers in an Ellwood factor table text is an example of:
Weighted mean
Interpolation
Extrapolation
Disintermediation
Interpolation
With DCF software, the appraiser should describe the software’s methods and ____________.
Assumptions
Reasoning
Error ratio history
Procedures
Assumptions
Calculating a number that is beyond a known range of numbers on which the calculation is based is an example of _____________.
Weighted mean
Interpolation
Extrapolation
Disintermediation
Extrapolation
Marketability studies address:
Absorption of the property into the market
Market lease rates
Analysis of comparable sales
A Cost-Benefit analysis
Absorption of the property into the market
The appraiser identifies the period required for cumulative income to equal initial investment as the:
Cash Recovery period
Investment Recovery period
Net Present Value
Payback Period
Payback Period
Plus or minus two standard deviations would encompass what percentage range on a normal distribution curve?
25%
33%
67%
95%
95%
Another term appraisers use for a step-up lease is:
Percentage lease
Multi-story building lease
Changing index lease
Graduated payment lease
Graduated payment lease
The type of floor covering with the longest high-end life expectancy is:
Carpet
Linoleum
Vinyl
Wood laminate
Wood laminate
Parking lots in condominium office complexes are considered:
Chattel
Conveyed by easement
Common elements
Conveniences in common
Common elements
hey would be part of the common elements owned and maintained by the association.
The operating expense figures assume that the management is:
A professional licensed company
Typical of the market area
Prudent and competent
Bonded and insured
Prudent and competent
Fees designed to offset the increased burden on infrastructure are what type of fees?
Police and fire tax
Development
New construction
Impact
Impact
Since the mid-1970s, appraisers have had to give extra consideration to:
Environmental contamination
Methods of transportation
Construction materials
Availability of water
Environmental contamination
A rate of return on capital usually expressed as a compound annual percentage rate is the _____________.
Discount rate
Yield rate
Capitalization rate
Annuity rate
Yield rate
The cost approach is often performed and reported first in an assignment because:
The results can be used in other approaches
It is the most important approach
Tradition
It comes first alphabetically
The results can be used in other approaches
Concessions can also contribute to:
A. Expenses
B. Collection Losses
C. Increases in PGI
D. Both A and B
D. Both A and B
If an appraiser finds that market rent is less than contract rent, the leased fee value compared to fee simple is:
The same
Less than
Greater than
Greater or less than
Greater than
The estate that has the right to use an easement is referred to as the:
Owner’s estate
Dominant estate
Servient estate
Easement estate
Dominant estate
When an appraiser performs an appraisal on a vacant acreage parcel and comparable sales are scarce, what is a common alternative?
Subdivision Analysis
Land Residual Technique
Debt Coverage Ratio
Sales Residual Technique
Subdivision Analysis
When the initial out-go is divided into the present value of the in-flows, that results in the:
Alpha index
Beta index
Cash flow index
Profitability index
Profitability index
The income classification after deduction of Vacancy and Collection Allowances is referred to as the __________.
Potential Gross Income
Effective Gross Income
Net Operating Income
Pre-Tax Cash Flow
Effective Gross Income
Tests to determine if an appraisal was done appropriately include all of the following EXCEPT:
Met reviewer’s own standards
Met peers’ actions
Met intended user’s expectations
Used recognized methods and techniques
Met reviewer’s own standards
Fees designed to offset the increased burden on infrastructure are what type of fees?
Police and fire tax
Development
New construction
Impact
Impact
The basic formula appraisers use for dealing with rates is:
I ÷ R = V.
R ÷ I = V.
I x R = V.
R x I = V.
I ÷ R = V.
The two types of Band of Investment methods appraisers use are:
Debt Coverage Ratio and Depreciated Cost
Mortgage Equity and Land-Building
Mortgage Equity and Debt Coverage Ratio
Land-Building and Depreciated Cost
Mortgage Equity and Land-Building
Of cleaning, decorating, painting, and pest control, which should an appraiser consider under Replacement Reserves?
Cleaning
Decorating
Painting
Pest control
Painting
The Scope of Work, as far as the acceptability of the degree of research, is determined by an appraiser’s peers’ actions and:
The intended user’s expectations
Secondary market requirements
The reporting format
The age of the property
The intended user’s expectations
The extra return demanded by investors because the projected cash flow might not happen is the ______________.
Safe rate
Market rate
Demand rate
Risk premium
Risk premium
When reversion cap rates are used, they should reflect investor expectations considering which of the following items:
Asset type
Cash flow projections
Age and condition
All of the above should be considered
All of the above should be considered
When reversion capitalization rates are used, they should reflect investor expectations considering the asset type, physical characteristics, age and condition, cash flow projections, and related factors. The projection or forecast period is a variable and should be based upon the same factors that typical market participants are using.”
Real Estate Taxes would be listed under what expense category?
Fixed
General
Reserves
Variable
Fixed
Valuing the income stream of a wasting asset is __________.
Inwood
Ellwood
Hoskold
Akerson
Hoskold
The shape of a parcel is typically least important to:
Free-standing single unit
Office buildings
Agricultural property
Shopping centers
Agricultural property
To add two numbers on an HP12C calculator, one enters the first number and then:
[ + ]
[ = ]
[ENTER]
The second number
[ENTER]
When an annuity has payments at the beginning of each period, it is referred to as a(n):
Annuity in advance
Annuity due
Annuity appurtenant
Pre-annuity
Annuity due
When the assignment is to determine market value, determination of the holding period is based upon:
The typical investor
A specific investor
What your peers consider an appropriate holding period
What intended users consider an appropriate holding period
The typical investor
The Scope of Work, as far as the acceptability of the degree of research, is determined by an appraiser’s peer’s actions and
intended user’s expectations.
Yield capitalization is a general term for income valuation methodologies that are
derived from sales.
future value estimates.
not direct capitalization.
on currently leased properties.
not direct capitalization.
Which of the following in NOT one of the basic steps of yield capitalization:
Determine the holding period
Calculate the cash flows
Select an appropriate yield rate
Determine the going-in overall capitalization rate
Determine the going-in overall capitalization rate
One of the results of the Tax Reform Act of 1986 was that:
Longer holding periods were no longer desirable
The advantage of shorter holding periods no longer existed
Tax shelters were eliminated
Investors were no longer permitted to purchase income producing properties
The advantage of shorter holding periods no longer existed
In yield capitalization, the yield rate and the overall capitalization rate function exactly the same.
TRUE
FALSE
FALSE
In what year did the tax law change to significantly impact the typical holding period duration?
1986
Which of the following would NOT be one of the basic steps involved in yield capitalization?
Estimate holding period
Determine estimated cash flows
Determine the going in cap rate
Calculate the present value of the cash flows and reversion
Determine the going in cap rate
