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Exam 8: Valuation Using the Income Approach

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Question 1

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Most appraisers adhere to an "above-line" treatment of capital expenditures. This implies which of the following?

A) Capital expenditures are subtracted in the calculation of net operating income.
B) Capital expenditures are subtracted from net operating income to obtain a net cash flow measure.
C) Capital expenditures are added to net operating income.
D) Capital expenditures are excluded from all calculations because they are difficult to estimate.

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Question 2

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For smaller income-producing properties, appraisers may use the ratio of a property's selling price to its effective gross income. This is an example of a:

A) Net operating income
B) Going-out cap rate
C) Going-in cap rate
D) Gross income multiplier

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Question 3

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Four highly similar and competitive income-producing properties located in close proximity to the subject property have sold this month. All four offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: $\begin{array} { | c | c | c | } \hline \text { Camparable } & \text { Sale Price } & \text { NOI } \\\hline \text { A } & \$ 1,450,000 & \$ 155,000 \\\hline \mathrm { B } & \$ 1,100,000 & \$ 135,400 \\\hline \mathrm { C } & \$ 1,250,000 & \$ 143,400 \\\hline \mathrm { D } & \$ 1,500,000 & \$ 169,000 \\\hline\end{array}$ Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject.

Given the following information, calculate the effective gross income multiplier. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: 15%, and Miscellaneous Income: $50,000.

In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is:

Given the following information, calculate the effective gross income multiplier. Sale price: $2,500,000; Effective Gross Income: $340,000; Operating Expenses: $100,000; Capital Expenditures: $36,000.

Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property assuming "below-line" treatment of capital expenditures. $\begin{array} { | c | c | } \hline \text { Subject Prqperty } & \\\hline \text { Nurber of apartrments } & 15 \\\hline \text { Market Rent (permonth) } & 1000 \\\hline \text { Vacarcy ard Collecticn Losses } & 10 \% \text { of PGI } \\\hline \text { Operating Expenses } & 5 \% \text { of EGI } \\\hline \text { Capital Expenditures } & 10 \% \text { of EGI } \\\hline\end{array}$

Net operating income is similar to which of the following measures of cash flow in corporate finance?

Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?

When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT:

The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method?

Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula. Overall market discount rate = 12%, Constant growth rate projection: 3% per year, Sale price: $1,950,000, Net operating income: $390,000, Potential gross income: $520,000.

Given the following information, calculate the overall capitalization rate. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: $50,000, and Operating Expenses: $50,000.

Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures. Property: 4 office units, Contract Rents per unit: $2500 per month, Vacancy and collection losses: 15%, Operating Expenses: $42,000, Capital Expenditures: 10%:

Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis. Mortgage financing = 75%, Typical debt financing cap rate: 10%, Sale price: $1,950,000, Before Tax Cash Flow (BTCF) : $390,000.

Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense?

Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?

Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $913,058 (you can assume that this cash flow occurs at the end of the year) . If you estimate the projected rental growth rate for the property to be 3% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 8%.

Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property using "above-line" treatment of capital expenditures. $\begin{array} { | c | c | } \hline \text { Subject Prqperty } & \\\hline \text { Nurber of apartrments } & 15 \\\hline \text { Market Rent (permonth) } & 1000 \\\hline \text { Vacarcy ard Collecticn Losses } & 10 \% \text { of PGI } \\\hline \text { Operating Expenses } & 5 \% \text { of EGI } \\\hline \text { Capital Expenditures } & 10 \% \text { of EGI } \\\hline\end{array}$

Given the following information, calculate the effective gross income. Property: 4 office units, Contract rents per unit: $2500 per month, Vacancy and collection losses: 15%, Operating Expenses: $42,000, Capital Expenditures: 10%