CAE Income Approach to Value

Question 1

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

Accepted Answer

Potential gross income minus vacancy and collection losses

Answer

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

Question 2

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

Accepted Answer

Debt service (mortgage payments)

Answer

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

Question 3

The direct capitalization formula states that value equals:

Accepted Answer

NOI divided by the capitalization rate

Answer

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

Question 4

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

Accepted Answer

A long-term typical market vacancy under normal conditions

Answer

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

Question 5

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

Accepted Answer

Variable expenses

Answer

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

CAE - Certified Assessment Evaluator Practice Test

CAE - Certified Assessment Evaluator Practice Test

CAE Income Approach to Value