Applied Methods and Techniques Flashcards

A property produces net operating income of $80,000, and the market capitalization rate is 8%. What is its indicated value by direct capitalization?

Answer: $1,000,000

Value = NOI ÷ cap rate, so $80,000 ÷ 0.08 = $1,000,000.

Financing covers 75% of value with a mortgage constant of 0.09, and investors require a 12% equity dividend rate. What overall rate does the band of investment produce?

Answer: 0.0975

(0.75 × 0.09) + (0.25 × 0.12) = 0.0675 + 0.03 = 0.0975.

Which item should be excluded from operating expenses when calculating net operating income?

Answer: Mortgage debt service

Debt service is a financing cost, not an operating expense, so it is left out of NOI.

Why do assessors often use a 'loaded' capitalization rate in ad valorem income valuation?

Answer: To include the effective property tax rate because property taxes depend on the value being estimated

Property taxes depend on the assessed value, so they are taken out of expenses and the effective tax rate is added to the cap rate.

A subject earns $48,000 in annual gross rent, and comparable sales show a gross income multiplier of 9. What is the indicated value?

Answer: $432,000

Value = gross income × GIM, so $48,000 × 9 = $432,000.

Land is valued at $300,000 with an 8% land cap rate, total NOI is $100,000, and the building cap rate is 10%. What total property value does the building residual technique give?

Answer: $1,060,000

Land income is $24,000, which leaves $76,000 for the building ($760,000 at 10%). Adding the $300,000 land gives $1,060,000.

What is the purpose of a reserve for replacements in an income approach operating statement?

Answer: To set aside funds each year for short-lived components such as roofs and HVAC

Reserves spread the cost of replacing short-lived building components over their useful lives.