ASC Property Valuation 3 — Questions and Answers
Question 1: In ARGUS Enterprise, 'Expense Recoveries' or 'CAM Reimbursements' are best described as:
- Deductions from gross revenue to arrive at effective gross income
- Additional income paid by tenants to reimburse landlord operating costs (Correct answer)
- Costs borne solely by the landlord under a gross lease structure
- The landlord's share of operating expenses under a triple-net lease
Correct answer: Additional income paid by tenants to reimburse landlord operating costs
Expense recoveries are income items where tenants reimburse the landlord for some or all operating expenses per their lease terms.
Question 2: Which of the following best defines 'Effective Gross Income' (EGI) in an ARGUS model?
- Total scheduled base rent before any deductions
- Gross potential income minus vacancy and credit loss plus miscellaneous income (Correct answer)
- Net operating income before debt service
- Base rent plus tenant improvement reimbursements
Correct answer: Gross potential income minus vacancy and credit loss plus miscellaneous income
EGI equals gross potential income less vacancy and credit loss, then plus any miscellaneous or ancillary income sources.
Question 3: An ARGUS model projects a 10-year hold with a sale at the end. If the going-out cap rate is applied to Year 11 NOI, what is the resulting value called?
- Present Value
- Net Present Value
- Reversion or Terminal Value (Correct answer)
- Debt Service Coverage Value
Correct answer: Reversion or Terminal Value
Capitalizing the stabilized NOI at the end of the hold period (often Year 11 or first year after sale) yields the reversion or terminal value used in the DCF.
Question 4: In ARGUS, 'Tenant Improvement Allowances' (TI) directly impact valuation by:
- Increasing the property's net operating income
- Representing a capital outflow that reduces cash flow and net sale proceeds (Correct answer)
- Reducing the market rent assumptions for future leases
- Increasing the terminal capitalization rate
Correct answer: Representing a capital outflow that reduces cash flow and net sale proceeds
TI allowances are landlord costs paid to build out tenant space, reducing cash available to investors and lowering property value in a DCF.
Question 5: In ARGUS Enterprise, what does the 'Absorption & Turnover Vacancy' assumption account for?
- Long-term structural vacancy in the market
- The period of vacancy between a tenant's departure and a new tenant beginning to pay rent (Correct answer)
- The percentage of tenants expected to default on rent
- The reduction in rent attributable to below-market leases
Correct answer: The period of vacancy between a tenant's departure and a new tenant beginning to pay rent
Absorption & Turnover Vacancy models the downtime between leases when the space is vacant and no rent is being collected.
Question 6: Which sensitivity analysis in ARGUS would most directly show the impact of changing market rents on property value?
- Varying the discount rate and terminal cap rate simultaneously
- Changing market rent growth rates across scenarios (Correct answer)
- Adjusting the operating expense ratio
- Modifying the loan-to-value ratio
Correct answer: Changing market rent growth rates across scenarios
Changing market rent growth rates directly affects projected leasing income, which flows through to NOI and ultimately the DCF-derived property value.
Question 7: When ARGUS calculates a property's Net Present Value (NPV), a positive NPV indicates:
- The property's income exceeds its operating expenses
- The investment generates returns above the required discount rate, adding value (Correct answer)
- The terminal value exceeds the sum of annual cash flows
- The debt service is fully covered by net operating income
Correct answer: The investment generates returns above the required discount rate, adding value
A positive NPV means the present value of all future cash flows exceeds the investment cost, indicating returns above the investor's required rate of return.
ASC Property Valuation 3
In ARGUS Enterprise, 'Expense Recoveries' or 'CAM Reimbursements' are best described as: