ASA Income Approach to Value 2 — Questions and Answers
Question 1: Which term describes the rate used to convert future income or cash flows into present value in a DCF analysis?
- Discount rate (Correct answer)
- Capitalization rate
- Gross rent multiplier
- Band rate
Correct answer: Discount rate
The discount rate reflects the time value of money and investor risk, converting future cash flows to a present value.
Question 2: Potential gross income (PGI) assumes a property is:
- 100% occupied at market rents (Correct answer)
- Occupied at current contract rents
- Partially vacant at market rents
- Occupied at below-market rents
Correct answer: 100% occupied at market rents
PGI represents the maximum income a property could generate if fully occupied at current market rental rates.
Question 3: Which expense is NOT typically deducted from income when calculating NOI in real property appraisal?
- Mortgage debt service (Correct answer)
- Property taxes
- Insurance premiums
- Management fees
Correct answer: Mortgage debt service
Debt service is a financing cost, not an operating expense, and is excluded from the NOI calculation.
Question 4: The equity residual technique in income capitalization applies the capitalization rate to which portion of income?
- Income remaining after debt service (Correct answer)
- Total net operating income
- Gross rental income
- Income before expenses
Correct answer: Income remaining after debt service
The equity residual technique capitalizes income remaining after satisfying the mortgage to estimate the value of the equity interest.
Question 5: A gross rent multiplier (GRM) is calculated by dividing:
- Sale price by gross rental income (Correct answer)
- Net operating income by sale price
- Sale price by net operating income
- Gross income by capitalization rate
Correct answer: Sale price by gross rental income
GRM = Sale Price ÷ Gross Rental Income, and is used as a quick valuation tool for small income properties.
Question 6: In ASA appraisal terminology, 'reversionary value' refers to:
- The expected sale price of the property at the end of the holding period (Correct answer)
- The current assessed value for tax purposes
- The depreciated replacement cost of improvements
- The value of a life estate remainder interest
Correct answer: The expected sale price of the property at the end of the holding period
Reversionary value (or terminal value) is the projected resale price of the property at the end of the investment or analysis period.
ASA Income Approach to Value 2
Which term describes the rate used to convert future income or cash flows into present value in a DCF analysis?