BOMA Asset Management & Property Valuation 2 — Questions and Answers
Question 1: The sales comparison approach to property valuation works by:
- Capitalizing projected future income to determine present value
- Estimating the cost to replace the building structure minus accrued depreciation
- Analyzing recent sales of comparable properties to derive market value (Correct answer)
- Calculating the discounted cash flows over a projected hold period
Correct answer: Analyzing recent sales of comparable properties to derive market value
The sales comparison approach identifies recently sold properties with similar characteristics and adjusts their prices for differences to estimate the subject property's market value.
Question 2: Commercial real estate due diligence prior to acquisition typically encompasses:
- Title review and purchase price negotiation only
- Physical inspection, financial review, legal analysis, and environmental assessment (Correct answer)
- Tenant interviews and market rent surveys only
- Insurance procurement and mortgage lender approvals only
Correct answer: Physical inspection, financial review, legal analysis, and environmental assessment
Thorough due diligence covers the physical condition of the asset, review of leases and financials, legal title and contract review, and environmental site assessments to identify risks before closing.
Question 3: A 'going-in' capitalization rate refers to:
- The projected exit cap rate estimated at the time of future property disposition
- The cap rate derived from stabilized year-two projected NOI
- The internal rate of return target set by the investment committee
- The cap rate applied to current NOI to determine the acquisition purchase price (Correct answer)
Correct answer: The cap rate applied to current NOI to determine the acquisition purchase price
The going-in cap rate is determined at the time of purchase by dividing current NOI by the acquisition price, establishing the initial yield on the investment.
Question 4: Portfolio diversification in real estate asset management is best achieved by:
- Concentrating all investments in a single high-performing market
- Maximizing leverage across all assets to boost equity returns
- Spreading investments across property types, geographic markets, and tenant industries to reduce risk (Correct answer)
- Acquiring only Class A trophy assets in gateway cities
Correct answer: Spreading investments across property types, geographic markets, and tenant industries to reduce risk
Diversification reduces concentration risk by ensuring that poor performance in any single property type, market, or tenant industry does not disproportionately harm the overall portfolio.
Question 5: The Internal Rate of Return (IRR) is primarily used in asset management to:
- Calculate the annual income yield from a stabilized property
- Determine the ratio of outstanding debt to current property value
- Measure the total return on an investment over the entire projected hold period (Correct answer)
- Compare gross rents among competing properties in the same submarket
Correct answer: Measure the total return on an investment over the entire projected hold period
IRR accounts for the timing and magnitude of all cash flows — including initial equity, annual income, and the eventual sale proceeds — to express total investment performance as an annualized rate of return.
Question 6: 'Economic vacancy' differs from 'physical vacancy' in that it additionally accounts for:
- Space that is physically unoccupied by any tenant
- Government-mandated rent controls that reduce allowable income
- The number of lease expirations expected in the next 12 months
- Income lost due to free rent concessions, below-market leases, and credit losses (Correct answer)
Correct answer: Income lost due to free rent concessions, below-market leases, and credit losses
Economic vacancy captures all sources of income loss, including occupied space generating reduced income from concessions or credit losses, not just physically empty suites.
Question 7: Under BOMA measurement standards, 'rentable area' typically includes:
- Only the square footage within a tenant's demising walls (usable area)
- Total floor plate area including all mechanical and structural spaces
- Usable area plus a proportionate share of common areas on the floor and in the building (Correct answer)
- Gross building area minus all vertical penetrations and exterior walls
Correct answer: Usable area plus a proportionate share of common areas on the floor and in the building
BOMA standards define rentable area as the tenant's usable area plus its pro-rata share of common areas such as lobbies, corridors, and restrooms, which is the basis for calculating rent.
BOMA Asset Management & Property Valuation 2
The sales comparison approach to property valuation works by: