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IAAO102 > Study set > Flashcards

Study set Flashcards

1
Q

What are the three components of the capitalization process?

A
  1. Value
  2. Net Operating Income (noi)
  3. Capitalization Rate
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2
Q

_____ is the borrowing of funds in hopes of earning a greater return than the cost of the borrowed funds.

A

Leverage

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3
Q

A mortgage only on personal property.

A

Chattel Mortgage

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4
Q

A __ mortgage covers real estate as well as personal property included with the real estate.

A

Package Mortgage

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5
Q

The _____ ______ _____ also known as the discount rate reflects the return ON investment.

A

Overall Yield Rate (Yo)

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6
Q

The ____ ___ provides for the return OF investment in the wasting portion of the asset.

A

Recapture rate

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7
Q

What is the IRV formula?

A

Income divided by Rate or Value. Also, Rate multiplied by Value equals Income

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8
Q

What is the VIF formula?

A

Value divided by Income or Factor. Also, Income multiplied by Factor equals value.

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9
Q

A ___ is a written document in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period in return for a specified rent.

A

Lease

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10
Q

___ rent is the amount derived when a contract rent exceeds market rent

A

Excess

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11
Q

___ rent occurs when market rent is greater than contract rent.

A

Deficit

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12
Q

The ___ is calculated by dividing the sales price (value) by the annual gross income.

A

Gross income modifier (GIM)

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13
Q

Potential gross income, minus _____ plus ____ equals Effective Gross Income.

A
  1. Vacancy and Collection Loss

2. Miscellaneous Income

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14
Q

Effective gross income, minus ___ equals Net Operating Income

A

Allowable Expenses

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15
Q

Total Expenses divided by Effective Gross Income =

A

Operating Expense Ratio

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16
Q

Six Improper Operating Expenses

A
  1. Depreciation
  2. Debt Service
  3. Owners Personal Expenses
  4. Capital Improvements
  5. Franchise Fees & Special Corporation Costs
  6. Real Estate Taxes
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17
Q

Six Proper Expenses

A
  1. Insurance
  2. Common Area Maintenance
  3. Property Management Fees
  4. Roof Maintenance
  5. Fire Sprinkler System Service
  6. Miscellaneous Expenses
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18
Q

___ ____ take the form of either free rent or extra tenant improvement allowances.

A

Rent Concessions

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19
Q

If income is 10% of the value of the property, then by dividing the income by 10% will indicate:

A

The total value of the property

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20
Q

The Overall Capitalization Rate expresses the relationship between ____ and market value of the property.

A

Net Operating Income (NOI)

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21
Q

What technique is used in direct capitalization?

A

Overall Capitalization Rate

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22
Q

Loaded Capitalization Rate is:

A

The Overall Capitalization Rate that is commonly used in ad valorem property tax appraisals

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23
Q

The following key characteristics of comparable sales used in analysis should be similar to the subject

A
  1. Land to Improvement (building) ratios
  2. Income and expense ratios
  3. Remaining economic lives (improvements)
24
Q

The ______ ____ ____ is the lenders return on the money borrowed

A

mortgage yield rate

25
Q

Net income ratio divided by the effective gross income modifier or (NIR/EGIM) equals

A

Capitalization Rate

26
Q

To find the Net Operating Income Ratio, you must take 100% ____ the operating expense ratio

A

Minus (NIR=100% minus operating expense ratio)

27
Q

Three components of an overall capitalization rate

A
  1. Overall Yield Rate
  2. Recapture Rate
  3. Effective Tax Rate
28
Q

The weighted average of the land capitalization rate and the building capitalization rate is known as the:

A

Overall Capitalization Rate

29
Q

The underlying principal providing the bases of income capitalization approach is:

A

Anticipation

30
Q

A written document in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time in return for a specified rent is:

A

Lease

31
Q

The Installment to Amortize $1 shows the periodic payment necessary to amortize a loan at a specific interest rate over a specific number of periods. This is also known as the :

A

Partial payment factor

32
Q

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

A

Effective tax rate.

33
Q

What are the 4 major characteristics of required comparability that must be considered when selecting improved property sales to use in the development of an overall capitalization rate.

A
  1. Amenities
  2. Land to improvement ratio
  3. Expense ratios
  4. Remaining economic life
34
Q

In a Straight-Line Capitalization Assumption, the ___ is likely to decline over the economic life of the improvement.

A

Income

35
Q

In a straight line-basis, _______ is received in equal amounts during the remaining economic life of the improvement.

A

Recapture

36
Q

The property’s ___ ____ (____) is received on the balance of the investment after a periodic recapture of a portion of the improvement value.

A

Overall Yield (discount)

37
Q

How do you determine the recapture rate on a building capitalization rate?

A

1 divided by remaining economic life.

38
Q

The land capitalization rate is composed of what components?

A
  1. Discount (overall yield) rate

2. Effective Tax Rate

39
Q

The building capitalization rate is composed of what components?

A
  1. Discount rate (or overall yield rate)
  2. Recapture rate
  3. Effective tax rate
40
Q

Direct capitalization is a valid method when the overall rate is developed from sales in which:

A
  1. The land-to-building ratios are similar to those of the subject property
  2. The remaining economic lives are similar to those of the subject property
  3. The income and expense ratios are similar to those of the subject property
41
Q

A review of the subject property’s ;ease shows the rent stated in the lease is $20 per square foot per year, with the landlord required to pay all expenses except for utilities , maintenance and taxes. Comparable properties in the market are currently being rented at $23 per square foot per year. Based on this analysis of the lease and comparable rentable properties, what type of lease and rent would this be?
A. Lease: Net lease
B Rent: Deficit rent

A

Rent: Deficit rent

42
Q

A comparable sale has been identified that is similar to the subject in terms of age, size, construction, condition, and location. It is a two-story office building and has a gross leasable area (GLA) of 16,000 square feet. The common area contains 3000 square feet and includes all hallways, elevators, stairs, and includes the reception area on the ground floor. The building rents for $380000 per year.

Analyze the rent schedule and develop rent per square foot as a unit of comparison, on both a gross square footage and a net square footage basis.

A

Gross: 380,000 divided by 16000 sf is 23.75 per sqft

Net 380,000 divided by 13000 sf is 29.23 per sqft

43
Q

The subject property has 12,000 square feet of net leasable area and is currently vacant. Before the former tenant moved out he property was renting for $20.00 per square foot. It is anticipated that the tenant improvement costs needed to attract a new tenant for a five-year lease will be $200,000. What would the rent be after making the tenant improvements, if you intend to recover the capital cost during the five-year lease?

A

TI per SQFT $200000/12,000 equals $16.67
TI per SQFT per year $16.67/5 years $3.33
Rent per SQFT for TI Cost Recovery $20.00 +$3.33 equals 23.33

44
Q

You are reconstructing an income and expense statement for a 180-unit apartment complex located just south of the central business district. The complex is eight years old and has typical amenities and management. The following 5 complexes are similar to the subject in management, age, condition, etc.

Apartment A 210 units 199 occupied units $1925,300 bill. rent $1,886,800 rent coll
Apartment B 180 units 171 occupied units $1,744,200 bill rent $1,709,500 rent coll
Apartment C 196 units 186 occupied units $1,899,200 bill rent $1,861,200 rent coll
Apartment D 200 units 190 occupied units $1,938,000 bill rent $1,898,000 rent coll
Apartment E 220 units 209 occupied units $2,131,800 bill rent $2,089,300 rent coll

A 
First: find the vacancy rate
210-199=11    11/210=.05
180-171=9     9/180=.05
196-186=10    10/196=.05
200-190=10    10/190=.05
220-209=11    11/220=.05

Vacancy rate is .05

Second find collection loss
$1,925,300-$1,886,800 = $38,500 $38,500/$1,925,300=.02
$1,744,200- $1,709,500=$34,700 $34,700/$1,744,200=.02
$1,899,200-$1,861,200=$38,000 $38,000/$1,899,200=.02
$1,938,000-$1,898,000=$40,000 $40,000/$1938,000=.02
$2,131,800-$2,089,300=$42,500 $42,500/$2,131,800=.02

Collection loss is .02

Vacancy rate+Collection loss is .07 or 7%

45
Q 
You have reconstructed the income and expenses on the subject property and have determined the following:
Rent income $500,000
Reimbursement income $160,000
Potential Gross income $660,000
Less Vacancy and Collection loss @10% $66,000
plus Miscellaneous income +$15000
equals Effective Gross income of $609000
Less: operating expenses $182,400
equals Net operating income of $426,600

Based on this reconstruction, the operating expense ratio (OER) would be:

A

$182400/609,000 = .30 or 30% (Operating expenses divided by EGI)

46
Q

Your assignment is to appraise a 30- unit apartment building. You have the owner’s operating statement prepared by the accountant. After careful analysis, you decide that all items are essentially correct. However, based on the data you have on file the owner did not include certain items that normally occur in the market. The owner did not include an allowance for vacancy and collection loss, which is 4% using a market study you recently conducted. Also, the owner manages the property did not include a management expense. An analysis of comparable data indicates that a typical management expense for this type of property is 55 of EGI. Painting and decorating should last 3 years.

Income or expense items Owners statement
gross income $365,000
Vacancy & Collection loss 0
Effective Gross Income $365,000
Expenses:
Management 0
Employees salary $34,022
Employees benefits $2160
Insurance $7000
Natural Gas $13445
Painting & decorating 5 units $6000
Repairs $8425
Supplies $2040
Electricity $4850
Water $1680
Real Estate Taxes $32550
Depreciation $56000
Interest on Mortgage $120650

A

Vacancy and collection loss (4% of GI)=$14,600
EGI $350,400
Management (5%of EGI) $17,520
Painting and decorating 5 units: $6000/5=$1200 per unit x 30=$36000/3years=$12000 per year.
all other deductions the same
Operating expense ratio=$111092/$350,400 (EGI)=.317 or 32%

46
Q

Your assignment is to appraise a 30- unit apartment building. You have the owner’s operating statement prepared by the accountant. After careful analysis, you decide that all items are essentially correct. However, based on the data you have on file the owner did not include certain items that normally occur in the market. The owner did not include an allowance for vacancy and collection loss, which is 4% using a market study you recently conducted. Also, the owner manages the property did not include a management expense. An analysis of comparable data indicates that a typical management expense for this type of property is 55 of EGI. Painting and decorating should last 3 years.

Income or expense items Owners statement
gross income $365,000
Vacancy & Collection loss 0
Effective Gross Income $365,000
Expenses:
Management 0
Employees salary $34,022
Employees benefits $2160
Insurance $7000
Natural Gas $13445
Painting & decorating 5 units $6000
Repairs $8425
Supplies $2040
Electricity $4850
Water $1680
Real Estate Taxes $32550
Depreciation $56000
Interest on Mortgage $120650

A

Vacancy and collection loss (4% of GI)=$14,600
EGI $350,400
Management (5%of EGI) $17,520
Painting and decorating 5 units: $6000/5=$1200 per unit x 30=$36000/3years=$12000 per year.
all other deductions the same
Operating expense ratio=$111092/$350,400 (EGI)=.317 or 32%

47
Q

You are appraising an apartment complex and want to develop an overall rate from the market. You find six sales of similar apartment complexes. How would you find the comparable based on sales price, remaining economic life, land to improvement ratio, expense ratio and net operating income?

A

Take the net operating income (NOI) divide by the sales price and choose the most common answer.

48
Q

For example, assume the effective gross income for a commercial property is $234,000 and the operating expenses for similar properties typically amount to 40% of effective gross income. Also assume the property sold recently for $1,123,200. what is the overall capitalization rate?

A

The next income ratio is .60 which is obtained by deducting the operating expense ratio of 40% from 100% (always from 100%). The effective gross income multiplier of 4380 is developed by dividing the sales price of $1,123,200 by the effective gross income of $234,000.
$1,123,200/$234,000=4.80

With this information the overall capitalization rate (Ro) can be computed as follows:
Ro=.60/4.80=1.25 or 12.5%

49
Q

Assume the land capitalization rate is 10% and the improvement capitalization rate is 14%. Assume further that the land represents 25% of value and the improvements represent 75% of value. Determine the overall capitalization rate using the band-of-investment method.

A

Property Component Percent of investment Cap Rate Product
Land .25 X land .10 = .025
Improvement .75 X bldg .14 = .105
1.00 always = .130

Subtract .75 from 1.00 to get the percent for land. Add product of land and bldg. to get total Overall Capitalization Rate

50
Q

Find Decimal equivalent for tax rates:

a. $65.00/$1000
b. 72 Mills
c. $4.50/100

A

a. .065
b. .072 ($72/1000)
c. .045 (convert to per 100 first. $42.50/1000

51
Q

The Smith’s property sold recently for $360,000. The assessment level in this area is 50%. The prior tax bill for the Smith’s was $5400. What is the effective tax rate?

A

Current Tax $5400
Property Value $360,000
ETR is $5400/$360000 = .15 or 15%

52
Q

The Jackson’s property is located in an area of town 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?

A

Convert $3.00 per hundred to per $1000. $3.00x10= $30.00/1000 = .03
.03x.50= .015 or 1.5%

53
Q

A property has a net operating income of $10,000, interest payments of $8000 and principle payments of $1000. What is the debt coverage ratio?

A

10000/(8000+1000)= 1.11

10000/9000=1.11

54
Q

An apartment house is valued at $420,000 and has a net income of $2800 per month. Calculate the overall capitalization rate for the investment.

A
  1. convert the $2800 per month to per year $2800x12=33600

2. Divide the per year value by the amount of the value 33600/420000=.08 or 8percent

55
Q

Change years of remaining economic life to recapture rates and recapture rates to years of remaining economic life using the reciprocal (1/x) of the information provided:

a. Remaining economic life of 25 years =recapture rate of
b. Recapture rate of .1000 = remaining economic life

A

a. 1/25=.04

b. 1/1000=10 years

IAAO102 (1 decks)

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