REL360 CHP 8

Which of the following is the most true?

Discount and expected growth rates rates drive cap rates

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

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

- Apartment appliances - Carpeting - Lobby furniture in an office building

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

- Hazard and fire insurance premiums - Property taxes

Which of the following are used in the direct capitalization approach to estimating a property's market value?

- Projected net operating income - Capitalization rate

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

- Rental income - Property maintenance - Vacancies

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

- direct capitalization - discounted cash flow

If it is correctly estimated, the effective gross income multiplier reflects

- expected rental growth - current vacancy - expected future vacancy

DCF analysis requires the appraiser to estimate

- 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

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

- going-in - overall

Other names for the cap rate used in direct capitalization include

- going-in cap rate - overall capitalization rate

Net operating income for an existing property

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

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

Cap rate information is often available from

- 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 - sale price

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 existing leases may be at rental rates below market

When estimating the future NOI of an existing property, the appraiser usually considers

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

Capitalization rates used to value the subject property are influenced by

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

The accuracy of quantitative valuation techniques depends heavily on

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

Cap rates

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

Which of the following statements best describes a "step-up" lease?

Rental rates increase at predetermined rates at predetermined times

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%, then the subject property should sell for times estimated NOI.

20

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%

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 true?

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

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

Discounting

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

False

True or false: The appropriate discount rate for valuation of the subject property can usually be found on a publicly accessible website.

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 items is considered the fundamental determinant of market value?

Net operating income

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%?

Rents at the subject property are too low

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: 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

Appraiser are more likely to estimate actual capital expenditures in the period (year) they are expected to be incurred if the appraiser is using ____________ to estimate value.

a discounted cash flow model

Assume the appraiser believes that all of the appliances in a small apartment complex will have to be replaced at the end of five years. The appraiser determines that $5,000 will have to be put aside each year in an interest bearing account (at 3%) in order to have enough funds available at the end of five years to replace the appliances. If this $5,000 is included in the estimation of net operating income, it is typically referred to as

a reserve for CAPX

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 market characterized by rising market rental rates, contract rental rates are generally "marked-to-market" (i.e., increased) by the owner when an existing lease expires. In general, leases are more frequently marked-to-market in

apartment properties

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

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

better able

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

The income producing ability of properties generally

declines over time

As the cap rate increases, the price (value) to NOI ratio

decreases

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

DCF valuation models

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

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

The going-out (terminal) cap rate for a stabilized property is typically ______ the going-in cap rate.

greater than

The appraiser would only forecast rental income that is "loss to lease."

if market rental rates for some of the space in the property are above the contract rental rates being paid by tenants

All else the same, higher purchase prices will _________ the capitalization rates.

increase

The income approach to valuation

is based on the concept of present value

"Income capitalization"

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

income capitalization

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

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

less

The net sale proceeds (NSP) at the end of the assumed holding period is equal to the expected sale price

less selling expenses

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

market rent

Which of the following expenditures does not affect the calculation of net operating income?

monthly mortgage payments

Generally, the lower the capitalization rate used the

more certain the appraiser is of future net operating income

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

In the presence of miscellaneous income, effective gross income is equal to

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

Market rent can be defined as the property's

potential gross rent

Typically, higher expected growth rates in rental income

produce higher effective gross income multipliers

Capital expenditures generally

prolong the economic life of the structure

All else equal, properties with riskier expected future cash flows

sell at higher cap rates

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

Effective gross income for the subject property is calculated by

subtracting estimated vacancies and collection losses from potential gross income

A cap rate is most analogous to

the dividend yield on a stock

When building a "reconstructed operating statement," the appraiser's starting point is

the historical experience of the subject property based on data provided by the current owner

Generally, the longer the lease terms associated with the subject property or the comparable properties,

the less reliable is direct capitalization relative to discounted cash flow

The average price-earnings multiples or ratios used to value the subject property come from

the sale prices of comparable properties

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