CCS Financial Analysis for Properties 3 — Questions and Answers
Question 1: In a condominium pro forma analysis, effective gross income (EGI) is calculated by:
- Adding potential gross income and operating expenses
- Subtracting vacancy and credit losses from potential gross income (Correct answer)
- Dividing net operating income by the cap rate
- Multiplying gross rent by the occupancy rate and adding other income
Correct answer: Subtracting vacancy and credit losses from potential gross income
EGI = Potential Gross Income − Vacancy Loss − Credit Loss, representing realistic collectible income.
Question 2: A fully funded reserve means the association has saved enough to:
- Cover all operating expenses for six months
- Pay off any outstanding mortgage on common areas
- Replace each component at the end of its useful life without a special assessment (Correct answer)
- Invest surplus funds in equities
Correct answer: Replace each component at the end of its useful life without a special assessment
A fully funded reserve (100%) means accumulated savings match the proportional deterioration of all reserve components, eliminating the need for special assessments.
Question 3: If a condominium unit's gross rent multiplier (GRM) is 12 and monthly rent is $2,000, what is the estimated value?
- $24,000
- $240,000
- $288,000 (Correct answer)
- $2,400,000
Correct answer: $288,000
GRM uses annual rent: $2,000 × 12 months = $24,000/year; Value = $24,000 × 12 = $288,000.
Question 4: Which document provides a forward-looking projection of association revenues, expenses, and reserve contributions for the coming fiscal year?
- Audited financial statement
- Annual operating budget (Correct answer)
- Reserve study
- Balance sheet
Correct answer: Annual operating budget
The annual operating budget projects expected income and expenditures, guiding the board in setting assessment levels for the upcoming year.
Question 5: A delinquency ratio of 15% in a condominium association most directly signals:
- Strong reserve funding
- Risk that operating cash flow may be insufficient to cover expenses (Correct answer)
- High owner-occupancy rates
- Compliance with Fannie Mae lending guidelines
Correct answer: Risk that operating cash flow may be insufficient to cover expenses
A high delinquency rate reduces collectible assessments, potentially causing cash shortfalls for maintenance, insurance, and debt service.
Question 6: The term 'replacement cost' in a reserve study refers to:
- The original purchase price of a component
- The current cost to replace a component with a new equivalent (Correct answer)
- The market value of the entire condominium building
- The book value after accumulated depreciation
Correct answer: The current cost to replace a component with a new equivalent
Replacement cost is today's estimated cost to install a new equivalent component, used to size reserve contributions accurately.
Question 7: Under accrual accounting, when would an association recognize a major repair expense?
- When the board approves the repair budget
- When the invoice is paid in cash
- When the repair is performed and the liability is incurred (Correct answer)
- When the reserve study recommends the repair
Correct answer: When the repair is performed and the liability is incurred
Accrual accounting recognizes expenses when they are incurred—when services are rendered—regardless of when cash payment is made.
CCS Financial Analysis for Properties 3
In a condominium pro forma analysis, effective gross income (EGI) is calculated by: