FIN 3070: Chapter 8
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
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. Subject Property Number of apartments: 15 Market Rent (per month): 1000 Vacancy and Collection Losses: 10% of PGI Operating Expenses: 5% of EGI Capital Expenditures: 10%of EGI
$137,700
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. Subject Property Number of apartments: 15 Market Rent (per month): 1000 Vacancy and Collection Losses: 10% of PGI Operating Expenses: 5% of EGI Capital Expenditures: 10% of EGI
$153,900
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
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 $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected growth rate for the property's NOI to be 5% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 9%.
$1,615,203.00
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
The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as:
capital expenditures.
Appraisers rely on recently completed transactions of similar properties to guide their selection of the cap rate to be used to value a single property. The method of estimating a cap rate from a series of comparable properties is more commonly referred to as:
direct market extraction.
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 (EBITDA)
When estimating the terminal value of a property (i.e., the estimate of the sale price at the end of the expected holding period), an appraiser will commonly use the direct capitalization approach. In this use of direct capitalization, the appraiser will divide the projected NOI for 1 year beyond the end of the holding period by which of the following?
going-out cap rate
Given the following information, calculate the effective gross income multiplier. Sale price: $950,000 Potential Gross Income: $250,000 Vacancy and Collection Losses: 15% Miscellaneous Income: $50,000
3.6
For smaller income-producing properties, appraisers may use the ratio of a property's selling price to its effective gross income; called an EMX. 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?
$388,986.00
Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures. Property: 4 office units Contract Rents per unit: $2,500 per month Vacancy and collection losses: 15% Operating Expenses: $42,000 Capital Expenditures: 10%
$60,000
Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 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 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today.
$92,790.45
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 growth rate for the property's NOI to be 3% per year and the going-out terminal or reversionary capitalization rate in year five 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 f
$974,610.00
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
7.35
Three highly similar and competitive income-producing properties within two blocks of the subject property have sold this month. All three 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: Comparable Sale Price NOI1 A $500,000 $55,000 B $420,000 $50,400 C $475,000 $53,400 Using the information provided, calculate the overall capitalization rate by direct market extraction a
11.4%
When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT:
mortgage payments.
Four highly similar and competitive income-producing properties located in close proximity to the subject property have sold this month. All four offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable Sale Price NOI1 A$ 1,450,000$ 155,000 B$ 1,100,000$ 135,400 C$ 1,250,000$ 143,400 D$ 1,500,000$ 169,000 Using the information provided, calculate the overall capitalizat
11.43%
The proportion of potential gross income not collected, even when supply equals demand in the rental market, is more commonly referred to as the:
natural vacancy rate.
Which of the following measures is considered the fundamental element needed to determine market value for an income-producing property?
net operating income
When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a:
net operating income statement.
The ordinary and necessary expenditures owners expect to incur during the next 12 months that do not materially add value, but keep the property competitive in its local rental market are more commonly referred to as:
operating expenses.
The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no vacancy or collection losses. This is commonly referred to as:
potential gross income.
Using the "Net Operating Income / Cap Rate = Value" formula, the cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that:
property values have decreased.
Discounted cash flow (DCF) valuation models differ from direct capitalization models in several important ways. When discounting future expected cash flows in the DCF methodology, which of the following rates should be used to determine the present value of the forecasted cash flow stream?
required internal rate of return
Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?
roof replacement
Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense?
state and local property taxes
Investment analysts and institutional investors adhere to a "below-line" treatment of capital expenditures. This implies which of the following?
Capital expenditures are subtracted from net operating income to obtain a net cash flow measure.
Using the "Net Operating Income / Cap Rate = Value" formula, 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.
Using the "Net Operating Income / Cap Rate = Value" formula, given the following information, calculate the overall capitalization rate. Sale price: $950,000 Potential Gross Income: $250,000 Vacancy and Collection Losses: $50,000 Operating Expenses: $50,000
15.8%
Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a variable operating expense?
utilities expenses
Which of the following property types probably would not be appropriate for income capitalization?
Public school
Which of the following statements best describes the expected relation between the going-in cap rate and the going-out cap rate for fully leased, stabilized properties in normal markets?
The going-in cap rate will be higher than the going-out cap rate as the income-producing ability of a property is expected to decline over time as the property ages, all else equal.
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 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 forecasts (models are then used to create the forecasts). 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.
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?
apartments
