Income Approach to Value Flashcards

What does 'effective gross income' (EGI) represent in the income approach to property valuation?

Answer: Potential gross income minus vacancy and collection losses

Effective gross income is derived by subtracting anticipated vacancy and collection losses from potential gross income.

Which of the following costs is typically classified as a 'below-the-line' expense NOT included in calculating net operating income?

Answer: Debt service (mortgage payments)

Debt service (mortgage payments) is a financing cost that falls below the NOI line and is not an operating expense of the property itself.

The direct capitalization formula states that value equals:

Answer: NOI divided by the capitalization rate

The direct capitalization formula is V = NOI ÷ R, where V is value, NOI is net operating income, and R is the overall capitalization rate.

In the income approach, a 'stabilized' vacancy rate assumes:

Answer: A long-term typical market vacancy under normal conditions

A stabilized vacancy rate reflects long-term typical market conditions rather than the current occupancy, ensuring the valuation is not distorted by temporary fluctuations.

Which category of expenses BEST fits 'property management fees' in income approach analysis?

Answer: Variable expenses

Management fees are variable expenses because they typically fluctuate with the level of collected income (e.g., a percentage of EGI).

The gross rent multiplier (GRM) is MOST useful for valuing which type of property?

Answer: Small residential income properties

The GRM is a simplified income multiplier best suited for small residential income properties where detailed expense data may be unavailable.

When contract rent is BELOW market rent, the tenant's interest is known as:

Answer: Leasehold estate value

When a tenant pays below-market contract rent, the benefit of that favorable lease creates a leasehold estate value attributable to the tenant.