Real Estate Chapter 8 - Valuation Income Approach

When estimating the net operating income of a property, which of the following expenditures would be included? - federal income tax payments - Property taxes - mortgage payments - Hazard and fire insurance premiums

- Property taxes - Hazard and fire insurance premiums

Which of the following are used in the direct capitalization approach to estimating a property's market value? -Estimated accrued depreciation -Expected sale price at the end of the expected holding period -Capitalization rate -Projected net operating income

-Capitalization rate -Projected net operating income

Which of the following should be accounted for in the calculation of net operating income? -Mortgage interest paid -Rental income -Property maintenance -Vacancies

-Rental income -Property maintenance -Vacancies

The main models or approaches to valuing real estate using income capitalization include -direct capitalization -rate of return analysis -holding period analysis -discounted cash flow

-direct capitalization -discounted cash flow

Cap rate information is often available from -local research companies -local government entities -brokerage firms -data providers

-local research companies -brokerage firms -data providers

To obtain a cap rate from the sale of a comparable property, the appraiser must obtain the comparable property's -net operating income at time of sale -net operating income in the year prior to the sale -sale price minus selling expenses -sale price

-net operating income at time of sale -sale price

Capitalization rates used to estimate the current market value of the subject property are sometimes referred to as the ______ cap rate. -overall -going-in -terminal -market adjusted

-overall -going-in

Other names for the cap rate used in direct capitalization include -overall capitalization rate -valuation rate -discount rate -going-in cap rate

-overall capitalization rate -going-in cap rate

Value estimates using direct capitalization are based on a ratio or multiple of expected NOI over the *blank* months.

12

Given the following information, calculate the net sale proceeds. Sale price: $974,000, Selling Expenses: $40,000; Remaining Mortgage Balance: $630,000; Net sale proceeds: $ *blank*

934000

True or false: The accurate valuation of income producing properties is primarily a number crunching exercise.

False

True or false: DCF valuation is really a combination of DCF and direct capitalization.

True

True or false: Effective gross income is affected by vacant space and by the extent to which current tenants have have lease rates that are below market

True

True or false: In the direct capitalization method, net operating income is divided by the capitalization rate to arrive at an estimated value.

True

True or false: The use of an effective gross income multiplier is most popular in the valuation of apartment properties.

True

As the cap rate increases, the price (value) to NOI ratio a. decreases b. is unaffected c. increases

a. decreases

In an "above-line" treatment of estimated capital expenditures, such expenditures are a. subtracted from effective gross income in the calculation of net operating income b. subtracted from net operating income to obtain the estimated net cash flow c. added to net operating income

a. subtracted from effective gross income in the calculation of net operating income

To calculate effective gross income in the presence of miscellaneous income, vacancy and collection losses are a. subtracted from potential gross income b. ignored in the calculation of effective gross income c. added to potential gross income

a. subtracted from potential gross income

Operating expenses that are incurred yearly with relatively little change are referred to as a. indirect expenses b. direct expenses c. fixed expenses d. variable expenses

c. fixed expenses

Appraisers generally forecast that a property's gross potential income will not be realized because -they expect the owner to occupy some of the space -some tenants will vacate space before their lease term expires -some tenants will vacate space after their lease term expires -not all tenants pay rent in a timely fashion

-some tenants will vacate space before their lease term expires -some tenants will vacate space after their lease term expires -not all tenants pay rent in a timely fashion

DCF analysis requires the appraiser to estimate -the appropriate cap rate to value the expected cash flows -the net cash generated by the sale of the property at the end of the expected holding period -future cash flows from annual operations -the holding period expected by the typical market participant

-the net cash generated by the sale of the property at the end of the expected holding period -future cash flows from annual operations -the holding period expected by the typical market participant

The accuracy of quantitative valuation techniques depends heavily on -the quality of the appraiser's cash flow assumptions -the experience of the appraiser -the quality of the cap rate or discount rate assumptions employed -the calculator skills of the appraiser

-the quality of the appraiser's cash flow assumptions -the experience of the appraiser -the quality of the cap rate or discount rate assumptions employed

A small office building has the following characteristics: net operating income, $65,000; operating expenses and capital expenditures, $33,000; vacancy and collection losses, $5,000. What is potential gross income assuming an above-line treatment of capital expenditures? a. $103,000 b. $121,000 c. $111,000 d. $98,000

a. $103,000

What was the sale price of the property if the effective gross income multiplier is 4.25, potential gross income is $125,000, and vacancy and collection losses are estimated at 2% of PGI? a. $520,625 b. $541,875 c. $531,250

a. $520,625

All else equal, properties with riskier expected future cash flows a. sell at higher cap rates b. have lower expected (internal) rates of return c. sell at lower cap rates

a. sell at higher cap rates

When analyzing the operating expenses of a small office building, which of the following is a relatively fixed operating expense? a. Hazard and fire insurance premium b. Heating and air conditioning expenses c. Management expense d. Monthly mortgage payment

a. Hazard and fire insurance premium

Which of the following is most likely to be classified as a capital expenditure? a. Roof replacement b. Property management expenses c. Mortgage payments d. Local property taxes

a. Roof replacement

Potential gross income is defined as the total income the property would produce a. assuming 100% occupancy and no collection losses b. tenants paid all operating expenses c. if not more than 15% collection losses were expected

a. assuming 100% occupancy and no collection losses

Two apartment markets are considered to be equally risky. If market participants expect more price appreciation in market A than in market B, a. cap rates will be lower in market A b. required returns will be lower in market A c. cap rates will be the same in both markets d. cap rates will be higher in market A

a. cap rates will be lower in market A

Market value is determined by a. demand and supply conditions b. the assumptions used in the DCF valuation model c. the methodology used to estimate market value

a. demand and supply conditions

To abstract the cap rate from the sale of a comparable property, the appraiser a. divides the NOI of the comparable property by the sale price of the comparable property b. obtains the cap rate used for valuation from other local appraisers c. divides the sale price of the comparable property by the NOI of the comparable property

a. divides the NOI of the comparable property by the sale price of the comparable property

Generally, when estimating market value, appraisers prefer to obtain the cap rate used to value the subject property a. from comparable sale transactions b. from survey results c. from consulting firms

a. from comparable sale transactions

If the property is expected to increase in value over the next year, the internal rate of return will be ______ the capitalization rate a. greater than b. less than c. equal to

a. greater than

"Income capitalization" a. is the process of converting a forecast of net operating income into an estimate of current market value b. is the process of converting net operating income in the last year of rental operations into an estimate of current market value c. is the process of converting a forecast of net operating income into an estimate of future market value

a. is the process of converting a forecast of net operating income into an estimate of current market value

An ownership interest in a property with existing leases is known as a a. leased fee estate b. partial estate c. fee simple estate

a. leased fee estate

The net sale proceeds (NSP) at the end of the assumed holding period is equal to the expected sale price a. less selling expenses b. less selling expenses and deferred maintenance c. less selling expenses and the remaining mortgage balance

a. less selling expenses

When using discounted cash flow analysis, an appraiser will prepare a multi-year cash flow forecast, which is often referred to as a a. multi-year pro forma b. reconstructed operating statement c. narrative appraisal report

a. multi-year pro forma

In the presence of miscellaneous income, effective gross income is equal to a. potential gross income, plus miscellaneous income, minus vacancy and collection losses b. potential gross income, plus miscellaneous income, plus vacancy and collection losses c. potential gross income, minus miscellaneous income, minus vacancy and collection losses

a. potential gross income, plus miscellaneous income, minus vacancy and collection losses

The average price-earnings multiples or ratios used to value the subject property come from a. the sale prices of comparable properties b. the sales of publicly-traded stocks c. the average multiple of the subject property in the last year

a. the sale prices of comparable properties

What is the overall capitalization rate for a rental property if potential gross income is $180,000, vacancy and collection losses are 2%, operating expenses are 25% of effective gross income, capital expenditures are 5% of effective gross income, and the sale price of the property is $1,480,000? Assume an above-line treatment of capital expenditures. a. 8.51% b. 8.34% c. 8.94%

b. 8.34% PGI: 180,000 -VC: -2% of 180,000 ----------------------- =EGI: 176400 -OE: -25% of 176,400 -CAPX: -5% of 176,400 ------------------------ =NOI: 123,480 NOI/Selling Price=Cap rate 123,480/1,480,000= 8.34%

What is the relation between capitalization rates and estimated property values? a. Reverse b. Inverse c. Direct

b. Inverse

The typical lease structure of ______ properties makes income multipliers a more appropriate valuation method than the lease structure of other property types. a. office b. apartment c. industrial d. retail

b. apartment

The rental income an existing, stabilized property is expected to generate, after allowances for vacancies and collection losses, is called a. gross potential income b. effective gross income c. net operating income d. gross operating income

b. effective gross income

Potential gross income is equal to a. effective gross income minus vacancy and collection losses b. effective gross income plus vacancy and collection losses c. net operating income plus operating expenses d. operating expenses plus vacancy and collection losses

b. effective gross income plus vacancy and collection losses

Present values are ______ future values. a. equal to b. greater than c. less than

b. greater than

All else the same, higher purchase prices _________ cap rates a. decrease b. increase c. do not affect

b. increase

Capital expenditures generally a. have no impact on the value of the property b. prolong the economic life of the structure c. occur at regular intervals

b. prolong the economic life of the structure

______ is the process of converting future values into present values. a. Compounding b. Annualizing c. Discounting

c. Discounting

Generally, which of the following is the most difficult to obtain and substantiate when abstracting a cap rate from a comparable sale? a. Name of the seller b. Sale price c. Net operating income d. Name of the buyer

c. Net operating income

An ownership interest in a property that is considered a complete interest without regard to any leases is a. a partial interest b. a leased fee interest c. a fee simple interest d. a compound interest

c. a fee simple interest

In a "below-line" treatment of expected capital expenditures, capital expenditures a. are subtracted from effective gross income to determine the subject property's NOI b. are added to NOI to obtain the subject property's effective gross income c. are subtracted from NOI to obtain the subject property's "net cash flow"

c. are subtracted from NOI to obtain the subject property's "net cash flow"

The most common method used in DCF analysis to estimate the value of the subject property at the end of an expected 10-year holding period is to a. capitalize NOI in year 10 into an estimated market value in year 10 b. assume the acquisition price will grow at some compound annual rate for 10 years c. capitalize NOI in year 11 into an estimated market value in year 10 d. assume the acquisition price will grow at the expected general rate of inflation in the economy over the next 10 years

c. capitalize NOI in year 11 into an estimated market value in year 10

Dividing the sale price of a comparable property by its annual effective gross income results in a(n) ______ which can be used to estimate the value of a subject property. a. gross rate of return b. capitalization rate c. effective gross income multiplier d. value ratio

c. effective gross income multiplier

The projected amount of income that is "loss to lease" in a given year a. is equal to the amount of rent that could be collected on vacant space if it were rented at market rental rates b. would be lower for properties that have a large number of below market leases c. equals what rental income would be if the property were fully leased at market rental rates, minus actual rental income

c. equals what rental income would be if the property were fully leased at market rental rates, minus actual rental income

Which of the following expenditures does not affect the calculation of net operating income? a. lawn maintenance b. minor property repairs c. monthly mortgage payments d. utility expenses

c. monthly mortgage payments

A cap rate is most analogous to a. the yield on a corporate bond b. the total return on a stock c. the dividend yield on a stock

c. the dividend yield on a stock

In ______, each approach to market value will produce identical estimates of value. a. practice b. some applications c. theory

c. theory

A small office building has the following characteristics: net operating income, $65,000; operating expenses and capital expenditures, $33,000; vacancy and collection losses, $5,000. What is potential gross income assuming an above-line treatment of capital expenditures? a. $111,000 b. $98,000 c. $121,000 d. $103,000

d. $103,000

cash flows beyond first year and changes in the value of the stock can significantly affect total *blank* of *blank* over the life of a stock.

rate return