Chapter 8
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?
$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?
$520,625
Value estimates using direct capitalization are based on a ratio or multiple of expected NOI over the next ____ months.
12 (or twelve)
If the appropriate cap rate for valuation is 5%, then the subject property should sell for ____ times estimated NOI.
20
The cap rate abstracted from the market is 0.066. The subject's estimated net operating income is $60,000. What is the value of the property by direct capitalization? (Round answer to nearest dollar amount.)
909,091
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: $____
934,000
Which of the following are used in the direct capitalization approach to estimating a property's market value?
Capitalization rate. Projected net operating income.
______ is the process of converting future values into present values.
Discounting
True or false: Federal income taxes are a property operating expense.
False
True or false: The accurate valuation of income producing properties is primarily a number crunching exercise.
False
When analyzing the operating expenses of a small office building, which of the following is a relatively fixed operating expense?
Hazard and fire insurance premium
What is the relation between capitalization rates and estimated property values?
Inverse
Generally, which of the following is the most difficult to obtain and substantiate when abstracting a cap rate from a comparable sale?
Net operating income
Which of the following should be accounted for in the calculation of net operating income?
Property maintenance. Rental income. Vacancies.
When estimating the net operating income of a property, which of the following expenditures would be included?
Property taxes. Hazard and fire insurance premiums.
Which of the following is most likely to be classified as a capital expenditure?
Roof replacement
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
An ownership interest in a property that is considered a complete interest without regard to any leases is
a fee simple interest
The typical lease structure of ______ properties makes income multipliers a more appropriate valuation method than the lease structure of other property types.
apartment
In a "below-line" treatment of expected capital expenditures, capital expenditures
are subtracted from NOI to obtain the subject property's "net cash flow"
Potential gross income is defined as the total income the property would produce
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,
cap rates will be lower in market A
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
capitalize NOI in year 11 into an estimated market value in year 10
As the cap rate increases, the price (value) to NOI ratio
decreases
Market value is determined by
demand and supply conditions
The main models or approaches to valuing real estate using income capitalization include
discounted cash flow. direct capitalization.
To abstract the cap rate from the sale of a comparable property, the appraiser
divides the NOI of the comparable property by the sale price of the comparable property
The rental income an existing, stabilized property is expected to generate, after allowances for vacancies and collection losses, is called
effective gross income
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.
effective gross income multiplier
Potential gross income is equal to
effective gross income plus vacancy and collection losses
The projected amount of income that is "loss to lease" in a given year
equals what rental income would be if the property were fully leased at market rental rates, minus actual rental income
Operating expenses that are incurred yearly with relatively little change are referred to as
fixed expenses
Generally, when estimating market value, appraisers prefer to obtain the cap rate used to value the subject property
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
greater than
Present values are ______ future values.
greater than
All else the same, higher purchase prices _________ cap rates
increase
"Income capitalization"
is the process of converting a forecast of net operating income into an estimate of current market value
A cap rate does not measure the expected total return because
it does not capture cash flows beyond the first year of operations. it does not capture expected appreciation in the value of the property.
An ownership interest in a property with existing leases is known as a
leased fee estate
The net sale proceeds (NSP) at the end of the assumed holding period is equal to the expected sale price
less selling expenses
Cap rate information is often available from
local research companies. brokerage firms. data providers.
Which of the following expenditures does not affect the calculation of net operating income?
monthly mortgage payments
When using discounted cash flow analysis, an appraiser will prepare a multi-year cash flow forecast, which is often referred to as a
multi-year pro forma
When using direct capitalization, ______ income is capitalized to obtain an estimate of value.
net operating
Appraisers generally forecast that a property's gross potential income will not be realized because
not all tenants pay rent in a timely fashion. some tenants will vacate space after their lease term expires. some tenants will vacate space before their lease term expires.
Other names for the cap rate used in direct capitalization include
overall capitalization rate. going-in cap rate.
Capitalization rates used to estimate the current market value of the subject property are sometimes referred to as the ______ cap rate.
overall. going-in.
In the presence of miscellaneous income, effective gross income is equal to
potential gross income, plus miscellaneous income, minus vacancy and collection losses
Capital expenditures generally
prolong the economic life of the structure
Cash flows beyond first year of rental operations and changes in the value of the stock can significantly affect the total ____ of ____ over the life of an stock.
rate return
To obtain a cap rate from the sale of a comparable property, the appraiser must obtain the comparable property's
sale price. net operating income at time of sale.
In an "above-line" treatment of estimated capital expenditures, such expenditures are
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
subtracted from potential gross income
The accuracy of quantitative valuation techniques depends heavily on
the experience of the appraiser. the quality of the appraiser's cash flow assumptions. the quality of the cap rate or discount rate assumptions employed.
DCF analysis requires the appraiser to estimate
the holding period expected by the typical market participant. future cash flows from annual operations. the net cash generated by the sale of the property at the end of the expected holding period.
Capitalization rates used to value the subject property are influenced by
the risk of subject property. expected appreciation rates of the property. returns available on alternative investments.
The average price-earnings multiples or ratios used to value the subject property come from
the sale prices of comparable properties
In ______, each approach to market value will produce identical estimates of value.
theory
