CAE Income Approach to Value 3

Question 1

In discounted cash flow (DCF) analysis, the 'discount rate' represents:

Accepted Answer

The required yield or total rate of return on the investment

Answer

The reduction applied to income for vacancy and collection loss

Answer

The difference between the mortgage rate and the equity rate

Answer

The annual depreciation rate applied to the improvements

Question 2

The 'reversion' in a discounted cash flow analysis refers to:

Accepted Answer

The projected resale value (net proceeds) at the end of the holding period

Answer

The reversal of previously claimed depreciation deductions

Answer

The difference between contract rent and market rent

Answer

The return of security deposits at lease termination

Question 3

When performing DCF analysis, terminal (going-out) capitalization rates are typically set HIGHER than going-in rates because:

Accepted Answer

The property will be older and perceived as riskier at the time of resale

Answer

Property values always increase over a typical holding period

Answer

Government regulations require higher terminal rates

Answer

Tenants typically pay lower rents at the end of leases

Question 4

Reserves for replacement are included in operating expenses in the income approach to account for:

Accepted Answer

Periodic replacement of short-lived building components

Answer

Annual increases in property tax assessments

Answer

Tenant security deposits held in escrow by the landlord

Answer

Emergency repair funds mandated by the mortgage lender

Question 5

Which type of property would MOST commonly rely on the income approach as the PRIMARY method of valuation for assessment purposes?

Accepted Answer

Stabilized apartment complex leased to multiple tenants

Answer

Owner-occupied single-family residence

Answer

Agricultural farmland used for crop production

Answer

Public library building owned by the municipality

Question 6

A net lease differs from a gross lease primarily in that under a net lease the:

Accepted Answer

Tenant pays some or all property operating expenses in addition to base rent

Answer

Landlord is solely responsible for all building operating expenses

Answer

Rent is calculated as a percentage of the tenant's gross sales

Answer

Lease term cannot exceed five years under standard practice

Question 7

When an assessor encounters a property with long-term leases at above-market rents, the appropriate value conclusion reflects:

Accepted Answer

Leased fee value, reflecting the actual above-market contract rent income stream

Answer

Fee simple value based solely on current market rents

Answer

Leasehold value attributable to the tenant's favorable position

Answer

The assessed value carried forward from the prior tax year