Appraisal Certification Exam

What is a gross lease?

A gross lease requires the lessor, or landlord, to pay the property taxes, property insurance, and maintenance expenses. Tenant pays a fixed rent.

What is a triple net lease?

A lease in which the lessee pays rent to the lessor as well as all taxes, insurance, and maintenance expenses that arise from the use of the property.

What is the difference between a net lease and a gross lease?

A net lease is characterized by the tenant paying all expenses. A gross lease is characterized by the property owner paying all expenses.

What is accrual basis accounting?

Accrual basis accounting records income when it is earned, whether received or not.

What is cash basis accounting?

Cash basis accounting records revenue when it is received and expenses when cash is paid.

A property is purchased with favorable financing. What would be the most likely effect of the favorable financing on the overall capitalization rate extracted from this sale?

Favorable financing indicates a safer investment with lower risk, which results in a lower capitalization rate.

Future cash flow dictates what?

Future cash flow dictates the current value of what a buyer is willing to pay for the property.

Explain negative/positive leverage. Use an example.

If the return to the equity declines because of the effects of a loan, the leveraging is said to be negative. If the return to the equity increases, the leveraging is said to be positive. Example: Bob sees a return on equity for an investment, without a mortgage, would be 13%. With a mortgage, it would be 12%, which is a negative decline, so he would be against obtaining financing for this investment.

The management fee in a reconstructed operating statement is usually computed as a:

Management fees are usually calculated as a percentage of effective gross income.

What is the formula used when asked for the income capitalization approach?

Market value = NOI / cap rate

Define as well as state the formula for the mortgage constant.

Mortgage constant = Annual debt service (i.e. the income to the mortgage) / Value of the mortgage (i.e. initial loan balance) It reflects the cap rate (the rate of return of and on the investment for the lender) of the mortgage and is NOT the interest rate.

What is PTCF? How is it calculated?

Pre-tax cash flow, also known as the equity dividend, typically used for income producing properties. It is calculated by NOI - debt service

What is the GRM (Gross Monthly Rent) formula?

Sale Price/PGI

Describe: GRM, GIM, EGIM and NIM

The GRM is normally used with monthly income. The GIM is normally used with annual income. An effective gross income multiplier (EGIM) is used with EGI, and a net income multiplier (NIM) is used with net operating income.

Band of Investment

The band-of-investment technique is commonly used to calculate overall capitalization rate, or overall rate.

The capitalization rate (Ro) is the

The capitalization rate reflects the rate of return of investment (getting your original investment back) and the rate of return on investment (receiving interest on your investment).

The debt coverage ratio (DCR) measures....

The debt coverage ratio measures the adequacy of NOI to cover the debt service. Lenders often look to this performance measure to see if the investment is efficacious.

Define leasehold and leased fee estate.

The execution of a lease can create two estates (ownership interests): the owner's interest (leased fee) and the tenant's interest (leasehold). Each can be valued, as can the estate of the owner as unencumbered by a lease, the fee simple estate.

What is an index lease?

The index lease bases rent on a known index or factor (aggregate) such as the Consumer Price Index (CPI).

Recapture

The return of the original investment over the life of the property is called recapture. The higher the recapture rate, the faster this original investment is returned.

An appraiser develops an appraisal on a property in order to help set an asking price for the current owner. In the appraisal report, the appraiser certifies that he did not make an inspection of the subject property. Is this permissible under USPAP?

Yes, USPAP does not require an appraiser to personally inspect the subject property. An appraiser is required to certify whether or not he/she made a personal inspection of the subject property.

Is replacement reserves included in NOI?

Yes, along with fixed and variable expenses, but NOT debt service.

What is yield capitalization?

Yield capitalization calculates the annual effects of changing income and expenses to derive an opinion of present value.

EGIM

effective gross income multiplier: Sales Price/Effective Gross Income

Excess Rent

the amount by which contract rent exceeds market rent at the time of appraisal

The break-even ratio measures...

the occupancy level at which the property can cover NOI and debt service The break-even ratio is (operating expenses plus debt service)/PGI. Say the expenses are $40,000 and debt service is $50,000. If PGI = $100,000 then: ($40,000 + $50,000)/$100,000 = .90. The subject breaks even at 90% occupancy.