Real Estate Chapter 8

Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first-year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization?

$1,806,666.67

Given the following information, calculate the effective gross income: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%.

$102,000

Suppose that an income-producing property is expected to yield cash flows for the owner of $150,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 8% annually and the property can be sold for $1,250,000 at the end of the fifth year, determine the value of the property today.

$1,449,635.50

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

earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA)

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

gross income multiplier

Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first-year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization?

$388,986

Analysis of a subject property's pro forma reveals that its fifth-year net operating income (NOI) is projected to be $100,282 (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 and the going-out capitalization rate in year 5 to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year 5 and incur selling expenses that amounted to $58,300.

$974,610

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

local property taxes

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

mortgage payments

Which of the following measures is considered the fundamental determinant of market value for income-producing properties?

net operating income

The starting point in calculating net operating income is the total annual income the property would produce assuming 100% occupancy and no collection losses. This is commonly referred to as

potential gross income

When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a

pro forma

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

Capital expenditures are subtracted in the calculation of net operating income

When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property's

terminal value

The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property's current income stream and its price or value. Which of the following statements regarding cap rates is true?

It is analogous to the dividend yield on a common stock.

The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run

three to five years

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.

12.5%

One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a graduated or step-up lease?

The lease establishes a schedule of rental rate increases over the term of the lease.

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?

Value estimates are based on a multiple of expected first-year net operating income

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

between 5% and 15%