chapter 8

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

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

the use of a discounted cash flow valuation model requires the appraiser to

- determine the expected holding period of the typical investor - estimate NOI over the typical holding period

the main models or approaches to valuing real estate using income capitalization include

- discounted cash flow - direct capitalization

capitalization rates used to value the subject property are influenced by

- expected appreciation rates of property - the risk of subject property - returns available on alternative investments

capitalization rates used to estimate the current market value of the subject property are sometimes referred to as the _____ cap rate.

- going-in - overall

a cap rate does not measure the expected total return because

- it does not capture expected appreciation in the value of the property - it does not capture cash flows beyond the first year of operations

which of the following items might be included in the "reserve for replacement" line item in a reconstructed operating statement?

- lobby furniture in an office building - apartment appliances - carpeting

net operating income for an existing property

- measures the overall income-producing value of the property - is considered the fundamental determinant of market value

which of the following should be accounted for in the calculation of net operating income?

- property maintenance - vacancies - rental income

when estimating the net operating income of a property, which of the following expenditures would be included?

- property taxes - hazards and fire insurance premiums

when estimating the NOI of an existing property, the appraiser usually considers

- recent information from the subject property - recent information from comparable properties

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

DCF analysis requires the appraiser to estimate

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

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

cap rates

- vary positively with expected returns on competing investments - vary inversely with expected appreciation in the value of the subject property

value estimates using direct capitalization are based on a ratio or multiple of expected NOI over the next _____ months.

12

if the appropriate cap rate for valuation is 5%, the the subject property should sell for _____ times estimated NOI.

20

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 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.

8.34%

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?

909,091

the typical lease structure of _____ properties makes income multipliers a more appropriate valuation method than the lease structure of other property types.

apartment

generally, DCF valuation models are _____ than direct capitalization models to handle the valuation of properties with multiple tenants and leases.

better able

which of the following are true?

cap rates are affected by required rates of return and expected growth rates

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

generally, if the property is subject to long-term leases to financially reliable tenants at rates above or below market, the estimation of potential gross income (PGI) will include the _____ rent of these leases.

contract

which of the following property features (1) affects the effective gross income multiplier of a comparable sale and (2) is included in the calculation of the EGIM?

current vacancies

_____ is the process of converting future values into present values.

discounting

the income a stabilized property is expected to generate, after allowances for vacancies and collection losses, is called

effective gross income

dividing the price of a comparable property by its annual effective 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

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

potential gross income is defined as the total income the property would produce if

fully leased at market rental rates

DCF valuation models

generally are better able to account for differences in lease terms and features than direct capitalization models

the final number produced by the direct capitalization approach is the

indicated value

the income approach to valuation

is based on the concept of present value

direct capitalization does not require the appraiser to estimate NOI for the subject property beyond the next 12 months because

it is assumed the buyers and sellers of the comparable properties had already done so

an ownership interest in a property with existing leases is known as a

leased fee estate

generally, investors are willing to pay _____ per dollar of current NOI for older properties than for new properties.

less

the rent that a property has the potential to generate in typical market conditions is called

market rent

the lower the capitalization rate used the

more certain the appraiser is of future net operating income

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

when there are differences in the indicated value from each approach, the appraiser should

place more weight on the approach that is the best indicator of value for the subject property type

market rent can be defined as the property's

potential gross rent

capital expenditures generally

prolong the economic life of the structure

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

rate; return

the property being appraised currently has no vacancy. what would you likely conclude if the typical vacancy rate for comparable properties in the market is 10 percent?

rents are too low

which of the following is most likely to be classified as a capital expenditure?

roof replacement

in an "above-line" treatment of estimated capital expenditures, such expenditures are

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

effective gross income is calculated by

subtracting estimated vacancies and collection losses from potential gross income

in an above-line treatment of capital expenditures, net operating income is determined by

subtracting operating expenses and capital expenditures from effective gross income

generally, when estimating market value, appraisers prefer to obtain the cap rate used to value the subject property

the comparable sale transactions

in _____, each approach to market value will produce identical estimates of value.

theory

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

true

true or false discount rates typically are determined by examining data on comparable property sales, evaluating the required returns on alternative investments of similar risk, talking to market participants, and reviewing investor survey information.

true

tenants of specialized properties generally seek to sign leases

with longer lease terms