BOMA Asset Management & Property Valuation 1 — Questions and Answers
Question 1: What is Net Operating Income (NOI)?
- Gross potential rent minus vacancy loss only
- Effective gross income minus all operating expenses (excluding debt service) (Correct answer)
- Total revenue minus all expenses including mortgage payments
- Net income after depreciation and taxes
Correct answer: Effective gross income minus all operating expenses (excluding debt service)
NOI equals effective gross income minus operating expenses, and importantly excludes debt service, depreciation, and income taxes.
Question 2: A commercial building generates $400,000 in NOI and sells for $5,000,000. What is the capitalization rate?
- 6%
- 7%
- 8% (Correct answer)
- 10%
Correct answer: 8%
The cap rate is calculated by dividing NOI ($400,000) by the property value ($5,000,000), which equals 8%.
Question 3: The income approach to property valuation is best suited for which type of property?
- Special-use properties such as churches or schools
- Income-producing investment properties such as office buildings and retail centers (Correct answer)
- Raw land with no existing improvements
- Owner-occupied single-family residences
Correct answer: Income-producing investment properties such as office buildings and retail centers
The income approach directly converts a property's expected income stream into a value estimate, making it most applicable to income-producing investment properties.
Question 4: The Debt Service Coverage Ratio (DSCR) primarily measures:
- The ratio of equity to total property value
- Annual mortgage payments divided by property value
- The ability of a property's NOI to cover its annual debt obligations (Correct answer)
- Net income as a percentage of gross revenue
Correct answer: The ability of a property's NOI to cover its annual debt obligations
DSCR is calculated by dividing NOI by annual debt service; a ratio above 1.0 indicates the property generates sufficient income to cover its loan payments.
Question 5: Class A commercial office buildings are best described as:
- Properties in suburban locations with deferred maintenance
- Older, functionally obsolete buildings with below-market rents
- Value-add opportunities requiring significant capital investment
- Premium-quality buildings in prime locations with modern systems and high-quality finishes (Correct answer)
Correct answer: Premium-quality buildings in prime locations with modern systems and high-quality finishes
Class A buildings represent the highest quality tier, featuring superior locations, modern building systems, high-end finishes, and strong management that command top-market rents.
Question 6: A 'value-add' real estate investment strategy primarily involves:
- Purchasing stabilized properties and holding for passive income
- Acquiring underperforming assets and improving them to increase NOI and property value (Correct answer)
- Developing ground-up construction projects in new markets
- Reducing asking rents to achieve full occupancy as quickly as possible
Correct answer: Acquiring underperforming assets and improving them to increase NOI and property value
Value-add strategies involve identifying properties with below-market performance and implementing improvements — such as renovations, better management, or lease-up — to drive NOI growth and enhance value.
Question 7: The Gross Rent Multiplier (GRM) is calculated by:
- Dividing NOI by the capitalization rate
- Multiplying monthly rent by 12 to annualize income
- Dividing the property's sale price by its annual gross rental income (Correct answer)
- Dividing effective gross income by total operating expenses
Correct answer: Dividing the property's sale price by its annual gross rental income
GRM equals sale price divided by annual gross rental income, providing a quick rough valuation metric that does not account for vacancies or operating expenses.
BOMA Asset Management & Property Valuation 1
What is Net Operating Income (NOI)?